Behind their apparent decline, European banks are punching above their weight outside of their home markets.
World series: how well does it travel?
It’s funny how American teams always seem to win the World Series . The competition in global investment banking may be a little more international, but the apparent world domination by US investment banks might be equally misleading. Perhaps the US banks will find out that, a little like their home-grown sports, they don’t travel so well.
That sounds absurd when you consider how the big Wall Street banks flattened their European competitors in investment banking last year. They filled the top five slots in the ranking of global investment banking fees for the first time since 2009 and their combined market share of 34% reached its highest level since before the financial crisis, according to Dealogic. The top five European banks could scarcely muster 20% between them (as per this chart):
In their home market, the big five US banks took the top five slots as well and in Europe they hammered the local competition, filling five of the top eight slots with their highest market share in a decade.
It looks like what a US banker might call a “shutout”, an American word for a “clean sheet” in football, or possibly a “slam dunk”. Whatever you call it, US banks appear to be tightening their grip on the world of investment banking as, one by one, their European rivals are forced to retire hurt.
But the closer you look, the less convincing this global domination becomes: once you strip away the huge in-built home advantage that US banks enjoy they seem far less confident playing away from home. In fact, on away form, it’s the Europeans banks that are punching above their weight. This poses presents both a threat and an opportunity to US and European banks alike.
Home sweet home
A huge part of the US banks’ global success is their dominance of their own very large backyard. They have a combined market share in the US that is twice that of their European rivals (44% vs 21%) in a market that is twice the size (generating nearly $38bn in fees last year compared with $18bn according to Dealogic).
That’s always going to give you a good headstart. The top five US banks made more than $16bn in investment banking fees in the US last year, or roughly four times as much as the European banks made from fees in Europe.
Playing away
Strip the US numbers out of the picture and you quickly get a sense of how reliant the big Wall Street firms are on their domestic business. On average the big five make little more than of their investment banking revenues outside of the US (ranging from just 27% at Bank of America Merrill Lynch to 43% at Morgan Stanley).
Here’s what happens when you rank the same 20 investment banks by fees earned outside the US:
While JP Morgan is still top of a revised ranking of investment banking fees in the rest of the world with $2.1bn, the Europeans start to fight back: Deutsche Bank leapfrogs its US rivals to second place, just ahead of Goldman Sachs. Credit Suisse, HSBC and UBS all climb the rankings while BAML and Citi are left propping up the top 10.
Take this a step further, and calculate the fees earned by investment banks outside of their home region, and the global domination of American banks is turned on its head (in this chart, BAML is highlighted in grey and Credit Suisse in yellow to highlight the trend):
Credit Suisse tops the rankings on away form, with $3bn of fees earned outside of Europe. Remarkably, Barclays and Deutsche Bank complete a European clean sweep with JP Morgan demoted to a lowly fourth place.
On this measure, every big US bank slips further down the league tables. The top five European banks earned $10.8bn between them outside Europe last year, while the big US banks made just $9.2bn. For example, BAML (which last year ran an advertising campaign with the slogan “the power of global connections”) has an 11% share of US investment banking fees, but just little more than 4% in Europe and less than 3% in Asia.
This presents an opportunity for European banks: if they can hold on to their existing market share at home, their business should improve as and when the European and Asian markets recover. They should also be able to squeeze out a little more share in the US as US banks run out of domestic growth. The threat for them – matched by the opportunity for their American rivals – is that the US banks continue to use their dominant position at home to subsidise their overseas business and tighten the screws on their struggling European and Asian rivals in their home markets.
In the investment banking World Series, the big question is not whether international teams will be allowed to play – they already are, and with greater success than US banks would like you to think. Instead, it’s whether the European banks will be able to hold on long enough for markets to recover – or whether they’ll be forced to throw in the towel in the middle of the innings.