Investment banking clearly isn't what it used to be. The two big U.S. banks that kick-started earnings season, JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) , both reported a fall in trading revenues amid low volatility.
European banks will start reporting third-quarter results soon, and they are likely to show the same pattern. For some of the biggest ones, the demise -- or rather, reduction to size -- of their investment banking units may be a good thing.
Scope Ratings, the European credit rating agency, recently looked at four banks in Europe that have significant investment banking activities and noticed they all are still cutting down on that side of the business or restructuring it.
(One issue that U.S. readers must note about this article: Share price performance quotes represent FactSet data for the European listings of these companies, which are more liquid than their New York-listed ADRs.)
Beleaguered Deutsche Bank (DB) is possibly the one that investors watch the closest. Year to date, the bank's shares have fallen by almost 8%, and CEO John Cryan is under increasing pressure to deliver some kind of growth this year. The bank is due to report earnings on Oct. 26.
Scope's report shows that Deutsche Bank's investment banking revenues declined significantly from 2012 to 2016. It blamed this drop on "costly internal restructuring efforts, combined with reputational risks," as well as challenging markets for fixed income and currencies (FIC).
The bank's FIC sales and trading revenues fell dramatically from 2012 to 2016, while equity sales and trading expanded slightly, according to data analyzed by the rating agency.
British bank Barclays (BCS) is another former investment banking giant with shrinking revenues. Coincidentally, it also reports results on Oct. 26. Investors have punished the British bank harder than the German one this year, as its shares have lost 14.5% year to date. Brexit worries are adding to a mix of other concerns, such as litigation risks and low profitability.
The bank has restructured its investment banking unit, keeping a core unit under Corporate and Investment Bank (CIB), which includes large U.K. and international corporate business, and closing down or selling non-core activities.
The CIB business is seeking to improve profitability, with return on average allocated tangible equity of 9.7% in the first half of this year, the analysts at Scope noted. From 2012 to 2016, Barclays' investment banking credit markets revenues fell while the share of equity markets revenue remained relatively constant, Scope data show.
Swiss banks traditionally have been big on investment banking, and UBS Group (UBS) is among the best. This bank's stock price has gained 5.8% year to date and almost 29% over the past year. It will report earnings on Oct. 27.
UBS focuses its strategy on global wealth management and is a leading universal bank at home, with investment banking supporting and complementing the overall business, according to Scope Ratings. The rating agency estimates the investment bank generated a return on attributed equity of more than 15% over the last year, in line with UBS management's target.
Within investment banking, from 2012 to 2016, the bank's revenues from FIC investor client services shrank, whereas those from equities investor client services expanded.
Credit Suisse (CS) has been favored by investors as well, with its share price climbing 9.3% so far this year and 26.5% over the past year. The bank has been restructuring since the financial crisis, with wealth management, rather than investment banking, now the largest contributor to revenue.
From 2012 to 2016, Credit Suisse's fixed-income sales and trading revenue shrank relatively sharply while equity sales and trading fell at a smaller pace. The bank increased revenues from its underwriting and advisory business over the same period. It reports earnings on Nov. 2.
As data on these four banks show, European banks are rebalancing their investment banking business, reducing their often-bloated fixed-income businesses and putting more emphasis on advisory services rather than just trading capabilities. In a little more than a week, when these banks start to release their earnings, investors will get a clearer look at how their efforts are working out.