Wall Street had a rollicking third quarter for fixed-income trading. Don't expect to see that kind of performance repeated across Europe.
The fixed-income, currencies and commodities businesses of U.S. firms from Goldman Sachs to Morgan Stanley posted increases in revenue ranging from 35 percent to as much as 150 percent. They were boosted by easy money policies from central banks that helped to fuel a boom in debt trading.
European investors hope this rising tide will lift all boats. Deutsche Bank, Barclays and Credit Suisse shares have enjoyed an October rebound, outpacing the broader market.
There's some substance to this optimism. It's hard to see how Europe's fixed-income monsters like Deutsche Bank and Barclays could fail to benefit from a quarter that saw an estimated 13 percent rise in credit volume traded, 28 percent growth in U.S. corporate debt issuance and currency-market volatility that's still well above 2014 levels, according to Bloomberg Intelligence.
But rising tides don't help if some boats are taking on water. Faced with stalling revenue and tougher regulation, European banks are still cutting their fixed-income operations, eliminating staff in the process and, for the time being, their appetite for risk-taking. U.S. banks took their restructuring medicine early.
That's why U.S. banks have increased their market share across many business lines and dominate the investment banking league tables. It's also why the rising-tide theory failed to work in the second quarter, when European banks' fixed-income revenue fell 11 percent. In the U.S., it grew 15 percent.
Predicting quarterly trading revenue isn't straightforward, but analysts expect European banks will post 10 to 20 percent growth in fixed-income trading revenue in the third quarter. That would be worse than U.S. peers, but better than the risk-averse, pre-Brexit referendum second quarter.
Deutsche Bank probably has the most to lose from the quarter -- CEO John Cryan still needs to convince investors he can shrink the bank without it going into terminal decline. He's cutting 9,000 jobs, about 9 percent of his staff globally.
The third quarter also saw acute pressure on the bank's own standing in financial markets: the threat of a $14 billion fine by U.S. regulators triggered a sell-off of its bonds and shares as investors fretted about the bank's capital strength.
Deutsche Bank's fixed-income trading trading revenue may have fallen to about 1.6 billion euros ($1.8 billion) in the third quarter, according to consensus estimates compiled by Kepler. That figure, though, may be clouded by the bank's reorganization of business lines.
The recent stabilization in Deutsche Bank's stock suggests that some of the optimism for earnings season is feeding through. But a performance strongly at odds with European and U.S. peers risks disappointing investors.
Barclays CEO Jes Staley may be able to offer comparatively better news to investors. The bank's strength in the U.S. could help it deliver fixed-income growth closer to peers like Goldman. Bernstein analysts expect a 39 percent revenue rise.
The British banks is also relaxing its hiring freeze after cutting almost 14,000 jobs over the past nine months. Deutsche Bank has (belatedly) only just begun its own hiring freeze.
The third quarter will therefore most likely mark a widening of the gap between U.S. and European banks. That's not disastrous in itself -- banks like Deutsche still need to take their medicine if they're to persuade investors they have a profitable business model.
But it still leaves investors waiting for that good-news moment that turns still-weak sentiment on European financials.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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