European Investment Banks Seen Facing Squeeze on Profits

European corporate and investment banks face a reduction in profitability from increased taxation, compensation restrictions and regulatory burdens, according to a report by Oliver Wyman and Morgan Stanley.

Return on equity, a measure of profitability, could decline by 2 percentage points to 3 percentage points, as regulators seek to reduce the interdependence of banking markets consultant Oliver Wyman and New York-based Morgan Stanley said in the report today. The industry has as much as $15 billion of annual expenses to meet the higher funding and operating costs, they said.

“The squeeze is beginning to hurt in Europe,” said Huw Van Steenis, a London-based analyst at Morgan Stanley in the report. Caps on bonuses, financial transaction taxes and firebreaks around consumer-banking units “are all making life increasingly difficult for European wholesale banks,” he said.

The region’s banks including Barclays Plc, Deutsche Bank AG and UBS AG have been cutting costs by eliminating staff and selling assets to meet tougher capital rules under Basel III international standards amid slower revenue growth due to the sovereign debt crisis. The European Union on Feb. 14 also unveiled its proposal for a 0.1 percent financial transaction tax on stock and bond trades and 0.01 percent on derivatives trades with ties to participating countries.

Lawmakers in the region have also banned banker bonuses that are more than twice fixed pay, potentially driving up fixed compensation for banks.

Non-U.S. firms may face higher costs to expand in the most profitable U.S. market, they said. The U.S. Foreign Banking Organization proposals will impose stricter capital rules and may be a “material challenge” for the overseas businesses of many foreign banks with the Americas representing about 47 percent of global revenues in 2012, Morgan Stanley and Oliver Wyman said.

“Disjointed international policies pose the biggest threat,” they said.

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