Europe’s failure to resolve its sovereign-debt crisis will force investment-banking chiefs in the region to consider shuttering entire businesses rather than rely on piecemeal job reductions to revive profit.
Dealmaking fees may drop 25 per cent this year from 2009, when the crisis began in Greece, research firm Freeman & Co estimates. European banks have cut about 172,000 positions since then, according to data compiled by Bloomberg, the same strategy they used after Lehman Brothers Holdings collapsed in 2008.
The game plan won’t work again as rising capital requirements and declining business alter the investment-banking landscape, investors and analysts say. New rules will reduce return on equity by six percentage points from about 14 per cent in the first half of 2011, according to consulting firm Bain & Co. Banks that relied on record low interest rates and a flood of cheap funding from the European Central Bank to delay deciding which units to close will be compelled to make choices.
“Investment banks have to shrink and do more than cut a little bit here and there,” said Lutz Roehmeyer, who helps oversee euro 10 billion ($12.5 billion) at Landesbank Berlin Investment in Berlin. “There’s too much politics and too little economics going on. They want to keep certain businesses for as long as possible.”
Some firms are cutting deeper. UBS AG, Switzerland’s largest lender, is reducing its fixed-income operations to focus on wealth management because of stricter capital requirements imposed by regulators and a weak revenue outlook linked to the continuing debt crisis. Still, even for all the job cuts, most European investment banks haven’t made significant changes since the upheaval that accompanied the collapse of Lehman Brothers, said Joao Soares, a partner at Bain in London. “Banks often play the last-man-standing strategy of maintaining capabilities until others are forced to leave,” Soares said. “They need to reinvent their core.”
The Bloomberg Industries European Investment Banks Index, which tracks UBS, Barclays Plc, Deutsche Bank, and Credit Suisse Group, has dropped 5.3 per cent this year compared with a 14 per cent gain in the 329-member MSCI World Financials Index. European banks that have investment-banking businesses trade at an average of 62 per cent of book value, while European financial firms trade at about 90 per cent.
The five US lenders with investment-banking and trading units — Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase & Co and Morgan Stanley — reported their lowest first-half revenue since 2008 and have stock prices that value the firms at a lower percentage of book value than banks without capital-markets units.