Derivatives Behind Equities Boom or Bust at Europe's Major Banks

  • BNP, Barclays, UBS post equities gains amid overall decline
  • European banks still losing market share to U.S. rivals

As fixed-income traders across European banks grappled with a slowdown in activity, their counterparts in equities units showed they could save the second quarter -- or make it worse.

BNP Paribas SA posted a surprise 26 percent jump in revenue from trading stocks and equity derivatives, leading its total trading to the smallest decline among major firms that have reported results. European rivals Deutsche Bank AG and Credit Suisse Group AG, meanwhile, both suffered drops of more than 20 percent from equities.

Investment banks across Europe are looking for ways to bolster profit from trading in order to pay for legal bills and costly overhauls. The task, already a challenge amid increased competition from U.S. rivals, was compounded in the second quarter by a decline across many fixed-income products, increasing pressure on lenders to make money from their equities units.

“Equity has been a better place to be this quarter than FICC," said Piers Brown, an analyst at Macquarie Group Ltd., using the acronym for fixed-income, currency and commodities trading. “Deutsche Bank and Credit Suisse are outliers. Quite why is still a bit unclear.”

Part of the gap between winners and losers was driven by equity derivatives, which investors can use to both wager on stock moves and hedge to protect against possible losses. Popular in times of volatility, traders in the instruments have struggled as stock markets hit record highs. The CBOE Volatility Index, a measurement of volatility known as the VIX, fell 10 percent in the quarter and is down 23 percent so far this year.

Still, BNP benefited from “structured products,” complex equity derivatives that can be tailored specifically for each investor, Yann Gerardin, head of the corporate and institutional unit, told reporters in Paris. UBS Group AG, where overall stock-trading revenue rose 2.6 percent, gained from “increased client activity” in equity derivatives, Chief Financial Officer Kirt Gardner told analysts today.

Low Volatility

Credit Suisse and Deutsche Bank attributed their slumps in part to derivatives businesses.

“Volatility is still very low,” Deutsche Bank Chief Executive Officer John Cryan said yesterday in response to analysts’ questions about the decline in equities trading. “The VIX was plumbing new depths in the past few days and client activity levels tend to be driven a little bit by volatility.”

Banks tend not to disclose precise figures for equity derivatives revenue. At Credit Suisse’s ‘‘solutions’’ unit, which trades in products including equity derivatives, revenue plunged 52 percent to $201 million for the second quarter. CEO Tidjane Thiam is restructuring the management of the division, Bloomberg reported last month.

Derivatives didn’t account for all the difference. Deutsche Bank said it had “significantly lower” revenues from its prime brokerage business as client balances fell because of concerns last year about the firm’s financial strength. Credit Suisse’s results were hurt by a 40 percent drop in the equities business in Asia.

Credit Suisse said its equities unit that focuses on Europe and the U.S. posted a 5 percent increase, excluding derivatives and a algorithmic business it’s moving to its asset management division.

The performance reflects "strong progress on the implementation of our strategy” and the "momentum and strength of the franchise," Nicole Sharp, a spokeswoman for the bank, said by email.

Business Mix

“Results at Deutsche Bank and Credit Suisse could have been influenced by their business mix, which is more European, less U.S.,” said Christopher Wheeler, an analyst with Atlantic Equities LLP in London. “There’s also the inevitable impact of disruption at the two institutions due to restructuring and market concerns.”

European banks have sought to invest in their equities businesses since new capital rules introduced after the financial crisis crimped the profitability of bond-trading businesses. They continued to lose market share to their U.S. rivals in the second quarter, Wheeler wrote in a note to clients.

“In short, talk of the Europeans getting back some market share is not illustrated by these numbers, which just reinforce how much stronger the large U.S. banks are at the moment,” he wrote.

— With assistance by Jan-Henrik Foerster, Fabio Benedetti Valentini, and Stephen Morris

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