Wall street is not American
2022.12.16 11:41
Wall street is not American
Budrigannews.com – BNP Paribas (BNPP.PA) is not the first financial institution to fly the 12-star European flag on American soil. In an effort to increase its share of the largest profit pool for trading and dealmaking in the world, the French lender is hiring, lending, broking, and hustling. DBKGn. Deutsche Bank Barclays (BARC.L) and DE) are doing the same thing. This time, the objective is to halt the expansion of Wall Street firms in Europe, not to add a European face to the banking industry’s Mount Rushmore. Shareholders should appreciate this plan.
For a decade, Europeans have been defeated by Wall Street’s cosy club. Following the financial crisis, American banks led by JPMorgan (JPM.N) emerged stronger and gained market share from foreign rivals, both domestically and internationally. JPMorgan and Bank of America (BAC.N) were able to recycle large amounts of retail bank profit into their trading and underwriting operations due to the relatively strong U.S. economy.
According to figures from their public filings, the top five Wall Street banks, which also include Goldman Sachs (GS.N), Morgan Stanley (MS.N), and Citigroup (C.N), increased their combined annual trading revenue by 40% between 2014 and 2021. In the meantime, the five largest European companies, which also include Credit Suisse (CSGN.S) and UBS (UBSG.S), lost more than 10%. The United States is effectively an oligopoly, despite the fact that the Europeans staged a fragile fightback in 2022, which included strong trading results from Barclays. Their combined market share has barely changed.
Due to their exclusion from the major leagues by the American colossi, foreign banks typically employ one of two strategies: zoom out or drill down. The first is what Deutsche Bank has done. In 2019, it began to discontinue its equities business and now concentrates on trading fixed-income securities and currencies, which account for approximately 60% of the trading revenue pool. Deutsche is concentrating on making the most of what it already has rather than adding any new people or risk to the United States. In the meantime, Barclays is attempting to regain business in areas such as macro trading, which includes interest rate bets.
In contrast, BNP is expanding into everything from foreign exchange trading and convertible bonds to cash equities and research, which it launched in the United States last month after acquiring control of brokerage Exane. According to Refinitiv, the French lender already earns more fees than any other European lender from underwriting debt. Despite the fact that its fees in the United States are still relatively low, BNP shares some characteristics with its American rivals, such as its size: With approximately $3 trillion in assets, it is within striking distance of JPMorgan. It also has a chief executive who has been there for a long time. While his major European rivals have all changed leaders in the past five years, Jean-Laurent Bonnafé has been in charge for 11 years.
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The Europeans are no longer attempting to buy their way into the big leagues, which sets them apart from the go-go era that existed prior to 2008. The final supersized attempt at grabbing land in the United States was Deutsche Bank’s $10 billion purchase of Bankers Trust in 1998, which briefly made it the largest bank by assets worldwide. Credit Suisse acquired Donald, Lufkin & Jenrette and First Boston a decade earlier, deals that will effectively be reversed when the troubled Swiss company spins out its investment bank. In contrast, in 2008, Barclays purchased the remaining Lehman Brothers assets.
In 2008, BNP bought Bank of America’s prime brokerage business, and in 2019, it bought Deutsche Bank’s prime brokerage business. After the Swiss bank lost its footing due to its exposure to the overstretched investment firm Archegos Capital Management, Bonnafé also went after Credit Suisse’s hedge fund clients. However, according to people familiar with the situation, the bank is not considering major acquisitions such as a bid for Credit Suisse First Boston.
The fact that the Europeans are behind even on their home turf is one issue. According to preliminary data from Dealogic, JPMorgan, Goldman Sachs, Bank of America, Citigroup, and Morgan Stanley were the region’s top investment bank fee factories in 2022. Even though Deutsche Bank is the best bank in Germany and French banks dominate their own market, they only account for one-seventh of the continent’s roughly $30 billion fee pool. Barclays came in third, behind two rivals from the United States, in the much larger UK market.
Making certain that domestic businesses and investment firms are not turned off by flashier Wall Street peers is essential to regaining that home advantage. In turn, this necessitates operating a substantial business in the United States. BNP, Barclays, and Deutsche are all vying for European customers whose business with the United States puts them in JPMorgan and its ilk’s sights. Senior bankers assert that rather than growing for the sake of growing, that is now the driving force behind the U.S. strategy.
European banks can’t take risks elsewhere because they have to deal with their own regulators, even when they have the best intentions. The European National Bank has demanded higher capital necessities on Deutsche and BNP to urge them to face less challenge on utilized credits, Bloomberg announced. Christian Sewing, the head of the German group, has issued a warning that watchdogs run the risk of undermining local lenders, leaving the bloc dependent on Americans. He suggests that in the event of a financial crisis, JPMorgan and others might close the drawbridge or concentrate on their domestic relationships, stranding European clients.
Money managers and fee payers in the bloc might also agree with that argument. A corporate giant like Siemens or a Dutch pension fund might want to strengthen their relationships with local banks in an ideal world. After years of cutting and changing, Deutsche and others are now making that decision easier by demonstrating a commitment to trading and investment banking. Retail banking businesses should be boosted by the end of negative ECB rates, giving European traders and underwriters more firepower.
This time around, investors ought to join the more rational investment banking push. With the exception of Citi, which is still on probation, they value the big American banks a little more than their net assets, whereas European banks are typically valued at less than half their own book value. They should be able to close that gap by winning business in their own neighborhood.
According to Dealogic data for the year ending December 14, 2022, JPMorgan topped the rankings for global fee revenue from investment banking. All five of the top fee-earning banks were American businesses, with Barclays in sixth place.
As they did in 2021, JPMorgan, Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs collectively occupied the top five positions for merger advisory and debt capital markets. With China’s CITIC Securities, four U.S. banks shared the top five for equity capital markets. In terms of revenue from syndicated loans, Barclays came in third, behind JPMorgan and Bank of America.
