European v US investment banks: Tectonic shifts
They have tried and mostly failed – European investment banks’ lag to their US peers is a blot on their international prestige and it is structural.
Much of the sector is in dire straits – partly because of previous efforts to compete globally. As investment banks, the Europeans are not even winning on their home turf. JPMorgan’s investment-banking revenue market share for Europe, Middle East and Africa in 2016 is way ahead of the rest, according to Dealogic. Goldman Sachs is a clear second. Barclays and Deutsche Bank have a shot at usurping Citi from third, but few will bet on the German’s chances now.
US banks have natural economies of scale in investment banking. Their home market is huge, much more based on capital market funding and more of an oligopoly. The Europeans must develop their role as intermediaries, but this has barely started. They are trying to beat the Americans at their own game; no wonder they are losing.
European investment banks can reach the top spots in their national markets, thanks to lending relationships with local corporates, so a little competence there goes a long way. Why not mesh more of them together? There is no shortage of big and better-valued European banks that could hoover up their bargain-basement peers over the border.
Again, the Americans win. The big European investment banks are mostly universal banks, so merging demands synergies in retail banking, which is hard because of wildly different national frameworks, particularly in mortgages. It is telling that one of the most-talked about acquisitions in Europe this year is a possible takeover by Intesa Sanpaolo of insurer Generali and perhaps Mediobanca. Intesa has been on the hunt for acquisitions and this is a domestic deal.
Société Générale’s CEO, Frédéric Oudéa, hopes technology might mean more synergies in retail banking across Europe in years to come. SocGen could be just the sort of bank to make a European champion. A merger with UniCredit, now led by former SocGen banker Jean Pierre Mustier, might make it happen sooner. Both have ambitions as corporate and investment banks and between them they have top positions in all three of the big European economies.
But Oudéa may be right to focus on getting his own house in order. Europe must get its priorities right: first, capital and operational efficiency; then, less corporate reliance on banks’ balance sheets and more integration of European capital markets.
Pan-European champions can only emerge after all that has been achieved and only then can they start thinking of global supremacy. By then, of course, they will have the Chinese banks to contend with too.