- Regulation, interest rates, economy curbing profitability
- U.S. firms are grabbing greater share of investment bank fees
Europe’s last global banks are caving in to pressure from regulators and preparing to tell investors just how much their aspirations will shrink.
"The European banks were too long holding onto the past and not realizing that this change is for good -- it’s permanent,” said Oswald Gruebel, a former chief executive officer of both UBS Group AG and Credit Suisse Group AG. “The main reason for reducing global investment banking is that with the capital requirements which the regulators put on these banks, you cannot make any decent return.’’
Deutsche Bank AG announced sweeping management changes on Sunday, less than two weeks before co-CEO John Cryan will present his plans to scale back the trading empire built by his predecessor. On Wednesday, Tidjane Thiam will probably reveal a strategy to prune Credit Suisse’s investment bank in favor of wealth management. Barclays Plc, BNP Paribas SA and Standard Chartered Plc are also trimming operations.
Europe’s global lenders are struggling to adapt to rising capital requirements, record-low interest rates and shrinking opportunities for growth. Their retrenchment risks further squeezing lending to economies in the region and handing more business to U.S. competitors, which were quicker to raise capital levels and are benefiting from growth at home.
“Everything that’s being done should have been done years ago,” said Barrington Pitt Miller, an analyst at Janus Capital Group Inc. in Denver. “The European muddle-through scenario has been proven not to be a terribly good one.”
Credit Suisse and Deutsche Bank are the worst performers among 10 global investment banks over the past five years, according to data compiled by Bloomberg.
Senior departures at Deutsche Bank include Colin Fan, 42, the co-head of the investment banking and trading unit, who resigned effective Monday, and Michele Faissola, 47, the head of asset and wealth management, who will leave after a transition period.
The shakeout may ease Cryan’s efforts to reshape the bank and repair relations with regulators after a record $2.5 billion settlement with U.S. and U.K. authorities for manipulating interest-rate benchmarks. Cryan, 54, replaced Anshu Jain in July after surging litigation costs and tougher regulatory demands squeezed profitability and eroded investors’ trust.
“We want to create a better controlled, lower cost, and more focused bank that delivers long-term value to shareholders,” Cryan said in a statement Sunday.
Thiam, who took over from Brady Dougan as CEO of Credit Suisse at mid-year, may tap investors for as much as 8 billion Swiss francs ($8.4 billion) to meet tougher capital requirements, people familiar with the plans said.
The former CEO of Prudential Plc said in July that Credit Suisse would focus on businesses, such as wealth management, that operate “comfortably” above their cost of capital. The Zurich-based firm has Switzerland’s second-largest private bank, giving it an attractive alternative to investment banking, something that Deutsche Bank lacks.
“Deutsche has the hardest challenge of all,” said Conor Muldoon, who helps manage about $40 billion at Causeway Capital Management, including shares of Credit Suisse, Barclays and UBS. “They’re predominantly an investment bank and it’s hard to see where is the jewel that investors can look to and say ‘this is how I can see a much higher-returning bank as you shrink back to, to what?”’
Deutsche Bank may shed almost 25 percent of the workforce through job cuts and the sale of assets, including its Postbank consumer-lending unit in Germany, a person with knowledge of the matter said in September. Cryan may forgo a dividend this year to conserve capital.
Jain, 52, said in an interview this month that Europe’s weak economy, low interest rates, tough competition and new regulation form “a powerful combination of headwinds.”
“The capital demands have gone up so much that even if you return to peak profits in your investment bank, that’s going to be a 10 percent return on equity at best for most banks,” said Justin Bisseker, an analyst at Schroders, which oversees about 310 billion pounds ($480 billion). “They’ve got to think about shrinking the business to a point where the ROE is sustainably above the cost of equity.”
Deutsche Bank and Credit Suisse had bet prices for their investment-banking services would rise as competitors such as Royal Bank of Scotland Group Plc and UBS pulled back. That plan didn’t pan out quickly enough, and investors lost patience.
Meanwhile, Europeans’ portion of investment-banking revenue is declining. Deutsche Bank, Credit Suisse, Barclays and UBS accounted for 29 percent of fees last year, down from 35 percent in 2011, according to data compiled by Bloomberg. Five U.S. banks made up the remainder.
“You’d expect to see the Europeans lose share to the Americans over time,” said Jonathan Fearon, who helps manage about 302 billion pounds, including shares in Swiss and French banks, at Standard Life Plc in Edinburgh. “That may not necessarily just be in Europe, but European banks pulling back in some of their more global ambitions as well.”