Citigroup Inc. (C)’s European chief, Jim Cowles, said so-called U.S. universal banks like his own are gaining market share in investment banking because they can absorb the rising cost of regulation better than European peers.
The third-largest U.S. bank is planning to hire “several” senior investment bankers in Europe, Cowles said in an interview in London. U.S.-based universal banks, which combine investment, consumer and retail banking, took “harder” decisions than European lenders when they recapitalized after the financial crisis more than four years ago, he said.
“There are only a handful of banks that have the size and scope to deal with the growing regulatory demands,” said Cowles, 57. “The result is likely to be consolidation of market share in the investment-banking business.”
Cowles’s view that U.S. firms may surpass European rivals was echoed by Deutsche Bank AG (DBK) co-Chief Executive Officers Juergen Fitschen and Anshu Jain, who cited regulatory burdens as a threat in the German lender’s annual report. Investment banks in Europe will also see their profitability reduced by taxes and compensation restrictions, Morgan Stanley and Oliver Wyman said in a report.
Citigroup, based in New York, today said first-quarter profit rose 30 percent as revenue from fixed-income trading and investment banking exceeded analysts’ estimates.
Cowles’s support for the universal bank model contrasts with criticisms such as that of JPMorgan Chase & Co. (JPM) analyst Kian Abouhossein, who said last week that top-tier investment banks are “uninvestable” and may be spun off by parent companies due to their regulatory burdens.
“Many of the European banks haven’t made the hard decisions yet,” Cowles said. “Going back four or five years, the U.S. banks made faster and harder decisions in terms of recapitalizing. The U.S. banks are therefore in position to gain market share in the next couple of years.”
Cowles said some universal banks may retreat to their home markets, while retaining a combination of consumer and commercial banking as well as securities businesses.
“We remain concerned regarding regulation which challenges the universal banking model, or which distorts the global regulatory ‘level playing field’ in a way that disadvantages European banks,” Deutsche Bank’s Fitschen and Jain wrote in an introduction to the annual report published today.
In Britain, banks are likely to shore up their capital by selling so-called contingent capital securities, Citigroup analysts led by Andrew Coombs and Ronit Ghose wrote in a note to clients today. Such securities convert to equity or are written off once an issuer’s capital ratios fall below a pre-set level. The analysts rate Barclays Plc (BARC), Britain’s second-biggest lender, as a “most preferred” stock.
Citigroup received the biggest bailout from U.S. taxpayers of any lender, including a $45 billion capital injection and a government guarantee of more than $300 billion of its riskiest assets. The bank lost $29.3 billion in 2008 and 2009 combined. It has since repaid its bailout funds.
Citigroup CEO Michael Corbat overhauled the firm’s operations outside the U.S. in January, naming Cowles his successor as head of Europe, the Middle East and Africa. In February, the firm hired former Credit Suisse Group AG (CSGN) banker Luigi de Vecchi for the newly created role of chairman of continental Europe for corporate and investment banking.
“We’re looking to make several more very senior, impact- level managing director hires in investment banking to strengthen both our geographic and industry capabilities,” Cowles said.
The bank isn’t planning to exit the 54 countries in which it operates across Europe, the Middle East and Africa, Cowles added. Citigroup employs about 35,000 people in the so-called EMEA region.
Corbat had said on March 5 that the lender could exit or pull back from businesses in 21 countries that are among its least efficient markets, without specifying them. The bank said on April 11 it would sell its consumer-banking unit in Turkey to OAO Sberbank, Russia’s largest lender, as it withdraws or scales back operations in some emerging markets.
The banking industry will continue to cut costs and jobs as it adapts to less activity, Cowles said. Financial services firms have announced 900,000 job cuts since 2008, according to data compiled by Bloomberg.
“As an industry, we are not through,” Cowles said. “We still have further to go as banks refocus.”
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