New York's Bankers Still Tower Over Europe

(Bloomberg Opinion) -- A blockbuster year for securities trading in 2020 helped some of Europe's investment banks gain market share as they compete against bigger Wall Street rivals. But the titans of U.S. finance — led by JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley — also expanded, meaning the bigger picture of New York dominance is still the same.

The overall gap between the U.S. and European banks remained steady in 2020 and, if anything, that divide will be harder to close as markets activity recedes from last year's stratospheric levels. Wall Street's broader base of business and a U.S. economic engine that's set to power ahead amid fresh stimulus will be difficult to contend with.

For Europe, ensuring its investment banks can remain in the game is key to a region that needs to deepen its capital markets to fuel growth, not least in the midst of the biggest economic contraction in living memory. While keeping pace with the U.S. is an achievement of sorts — on bond trading at least — no one should kid themselves about who rules the investment banking roost. 

Now that the biggest banks have reported their 2020 numbers, it's clear that two of Europe's top trading firms — BNP Paribas SA of France and Britain's Barclays Plc — did make relative gains in fixed-income revenue that surpassed many U.S. peers. But collectively, the top firms in the two continents grew at roughly the same speed in these activities between 2018 and 2020, data from Bloomberg Intelligence show. What's more, European firms dropped out of the fixed-income top five last year as Deutsche Bank AG slipped back a notch.

While it's difficult to know precisely how business moved around — banks don't disclose revenue by region, for example — European firms probably benefited in part from some of their smaller regional rivals retrenching in bond trading.

Meanwhile, in the smaller equities business the Europeans' performance was poor last year, with BNP and Societe Generale SA losing money on derivatives that backfired. In equities the top European firms have lost ground to Wall Street since 2018. Only one European bank, Switzerland's UBS Group AG, was among the world's top five equity traders last year.

This all matters because European firms, from Deutsche to SocGen, have been trying to convince their shareholders to let them stick with their trading operations to balance their businesses. Investors had been burned by years of meager profitability from these activities because of post-financial crisis rules and banks trying to be all things to all people. But fixed-income trading was largely a silver lining in 2020, helping to offset low and declining margins in commercial lending and pandemic-related worries about loan losses.

The craze for special-purpose acquisition companies (SPACs) has provided juicy capital-markets commissions for European firms, too. But it's hard to see the continental lenders' broader troubles becoming any easier.

Even if they do stick with trading, keeping up with Wall Street will only get tougher. The shift to electronic trading will need further investment and Wall Street's deeper pockets are better suited to that. While Barclays says it will be judicious in the pace of investments, JPMorgan has increased its spending. The shift to passive investments — led by BlackRock Inc. and Vanguard Group — provides U.S. banks with vast flows of activity.  

You can see why European regulators want to encourage consolidation. Even the biggest lenders here have been struggling for years to keep up with global finance. The fragmentation of the region's markets after Brexit will be another headwind.

The trading horserace isn't just of interest to industry highfliers seeking to justify their bonuses. Whether European banks can stay fit, healthy and well-capitalized will help determine how well the economy emerges from the ravages of Covid.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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