Credit Suisse raises 6 billion Swiss francs in fresh capital while reducing the amount it allocates to securities trading; Deutsche Bank splits its investment banking division in two and wants to reduce it; Planned Barclays chief executive Jes Staley is expected to cut its investment bank outside the UK and US. It doesn’t take a rocket scientist to notice a common theme among European investment banks: backsliding.
In April, I wrote that Europe needed at least one investment bank to compete head-on with American giants such as Goldman Sachs and JPMorgan Chase. Soon after, Anshu Jain resigned as co-CEO of Deutsche Bank and European banks headed in the opposite direction. UBS, which has increased its profitability since scrapping bond trading in 2012, is the new model.
We can see their point. It is very difficult to break into Wall Street and even Goldman is struggling with bond trading, the main revenue generator of the pre-2008 boom. It is even more difficult for European banks such as Deutsche to make a return. decent when those businesses were hit by higher capital and liquidity requirements. Shareholders are no longer prepared to tolerate procrastination.
Global investment banking is an expensive business that involves paying a lot of employees to do many different things – from business advisory to underwriting stocks and bonds, trading currencies and precious metals – in many places at once. When enough of these activities work well, they support the rest; when few are, it is painful.
But as Napoleon discovered on his return from Moscow in 1812, retreating can be at least as difficult and risky as advancing. In theory, it makes sense to drop the parts of investment banks that don’t get high returns and keep the parts that do. In practice, it is not as simple as that. If that were the case, European banks would not have grown so much in the first place.
The first difficulty with retirement is that you need a better place to retire. UBS made the point three years ago because its fixed income division not only faced regulatory pressure, but was barely profitable in the first place. In the meantime, it had one of the best private banking and wealth management divisions in the world. What would you have done?
Credit Suisse has a comparable ease of choice, although less obvious than UBS since its wealth management arm is smaller and operates the former First Boston on Wall Street. Tidjane Thiam, his new managing director, has now firmly placed him on the path to UBS. Similarly, Barclays has a decent investment bank in the US and UK, and a strong retail bank in the UK, although it faces the issue of UK capital closure.
John Cryan, the new managing director of Deutsche Bank, has a more difficult task. Not only was Deutsche’s national retail bank surpassed by the German savings bank, but bond trading was its greatest strength. She wants to strengthen equities and wealth management, but that will take time – in the meantime, she cannot retreat at the speed of UBS because she would have too little left.
The second difficulty is that the different parts of a global investment bank fit together in such a way that it is difficult to eliminate the loss-making ones while retaining the profitable ones. Stock trading and brokerage, for example, are standardized activities with low margins, but they enable profitable activities such as stock underwriting. There is collateral damage if you cut it.
Every bank aspires to have a large wealth management division; advising companies on mergers and acquisitions; to subscribe to IPOs and to operate in profitable markets without having to maintain offices open in countries in recession. But it took banks like Morgan Stanley decades of investment — and consistency — to reach their lead.
Third, doing some things but not others is a tricky brand offering. Most of us know what a global investment bank offers: extensive financial services for corporate and institutional investors. We also understand what a boutique bank does – a few services for businesses, including advisory work. But what about a mid-sized European bank with global reach?
UBS, for example, is big in equities and trades in precious metals and currencies, but has cut back its obligations sharply. He has a limited consulting business in the United States, focusing on a few industries such as healthcare. The result is handsomely profitable – it achieved more than double its 15% return on equity target in the second quarter – but it’s not easy to define.
Retreating can work if executed well – the easiest way to increase profits in a contracting market is to cut costs – but it requires a clear destination and strong management. The latter is extremely rare in investment banking, which has generally been run by chaining financial activities loosely and giving the biggest year-end bonuses to those who earn the most.
European banks need leaders to tackle operations in detail, cutting some while hurting others as little as possible. Deutsche brought in Mr. Cryan, formerly of UBS; and Barclays is considering swapping Antony Jenkins, an unsympathetic retail banker on Wall Street, for Mr Staley, who worked at JPMorgan.
If they can’t solve the puzzle, probably no one else will.