It's a well-explored theme that Europe's investment banking pie is shrinking. What's less widely appreciated is just how fierce the fight is going to get for a piece of that diminishing prize. The result will be messy for everyone -- including Wall Street.
Under new chief executives, Deutsche Bank, Credit Suisse and Barclays are finally getting round to a much-needed shake-up. The aim for all three is to scale back in investment banking, where results are weighed down by post-financial crisis capital rules and volatile financial markets.
But even as this massive upheaval takes place, the pool of investment banking revenue is already shrinking much faster than anyone expected, as results reported by Europe's biggest banks this earnings season show. Investment banking revenue at Deutsche Bank fell 30 percent in the fourth quarter of 2015 from a year earlier, while that of Credit Suisse was down 26 percent. At UBS, the decline was 10 percent.
There's a danger for even those banks that have already put themselves on a better footing -- UBS, say, or the Wall Street banks. If the laggards execute their planned turnarounds just a fraction as well as they hope, the result will be yet more competition in a rapidly shrinking market. And even if the turnaround efforts falter, the fight is likely to be hugely disruptive in the short term as it puts downward pressure on margins and upward pressure on compensation for the best bankers.
There are signs that this turbulent dynamic is already playing out.
Take Credit Suisse, the Swiss bank that this week announced a 5.8 billion-franc ($5.8 billion) loss for the fourth quarter of 2015. CEO Tidjane Thiam plans to shift the balance of his business toward wealth management, which is typically more stable than investment banking.
This includes plans to cut headcount across the bank but it certainly doesn't signal a blanket withdrawal from the investment banking industry. Credit Suisse wants instead to "rebalance the product mix," to use its own jargon, towards advising on deals and equity underwriting and away from volatile trading.
In the short term, that's meant hiring new staff and paying bigger salaries in an investment banking business that, Thiam says, "suffered from under-investment in the past." The result: Credit Suisse said expenses in the investment bank jumped 31 percent last year, due primarily to spending on "strategic hires," salary increases and the cost of beefing up risk and compliance functions. Hardly a sign of retrenchment.
So far, after a miserable end to 2015 for Europe's investment banks, this year is off to a stinker. Clients are hunkering down. Markets are treacherous. Stiffer competition, whether the result of desperate efforts to cling on to market share or to rebalance toward stable sources of revenue, will be a burden right across the sector.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects currency to francs in sixth paragraph)
To contact the author of this story:
Duncan Mavin in London at firstname.lastname@example.org
To contact the editor responsible for this story:
James Boxell at email@example.com