Bloomberg: Investors’ Message for European Banks: Avoid Wall Street

Ioana Erdei 30/04/2018 | 13:39

The market has been calling for some time on Europe’s banks to seek their fortunes away from Wall Street. After lenders’ first profit indications for the start of 2018, buyers rewarded Credit Suisse Group AG for doing just that, while punishing Barclays Plc and UBS Group AG, in part because their results owed too much to the volatile world of trading stock and bonds, according to Bloomberg.

Credit Suisse attracted new assets to its wealth management division at the fastest pace in seven years, showing Chief Executive Officer Tidjane Thiam’s pivot to wealth management is working. At 694 million Swiss francs ($703 million), net income was boosted by gains in the international unit that caters to rich clients.

 Cross-town rival UBS, which had completed that shift years ago, was one of the worst-performing European bank stocks last week — despite a stellar performance in investment banking — because the key wealth management unit disappointed. The division, which oversees $2.3 trillion and accounts for more than half of UBS’s pretax profits, posted first-quarter earnings that missed analyst estimates.
 Staley’s Triumph

While the Swiss transition to wealth management is in full swing, Barclays still sees itself as a Wall Street firm, and the first-quarter results showed Chief Executive Officer Jes Staley may indeed have a case. Revenue at Barclays’s equities-trading unit surged 28 percent to 590 million pounds ($812 million) in a quarter when volatility in markets climbed to levels not seen in three years. When translated into dollars, the performance exceeded the 32 percent total gain reported by the five biggest U.S. banks, the firm said.

Staley, an American, has repeatedly defended the investment bank against calls to cut it, and he may still encounter resistance. The bank’s directors plan to review progress of his strategy in November. And he must reckon with Edward Bramson, the activist investor whose Sherborne Investors bought more than 5 percent of Barclays in March and who is keen to push for change.

But Staley’s challenges are nothing compared with Deutsche Bank AG, which last week abandoned its decades-long ambition to be a top global securities firm. After ousting Chief Executive Officer John Cryan and replacing him with Christian Sewing in a chaotic management shakeup, the lender announced its fourth turnaround effort in three years. The goal: to focus more on its European clients and reduce capital-intensive and loss-making activities mainly in the U.S.

Sewing’s Struggles

The announcement, while short on details, distracted from and all-round disappointing quarter for earnings. Among the low lights was a 17 percent drop in trading revenue from a year earlier, compared with an increase at U.S. rivals, and a $46 million loss on a botched block trade in the stock of a U.S. pipeline company. Unlike the Swiss, Germany’s largest lender doesn’t have a large wealth management business to fall back on if the investment bank isn’t doing well.

The other big lesson from the barrage of initial earnings is more a reminder of an old truth: banking is a cyclical business. A mature economic recovery is fueling demand from borrowers while low interest rates keep bad loans in check. Such tailwinds helped Spanish banks such as Banco Bilbao Vizcaya Argentaria SA, which have concentrated on traditional private and commercial lending, to blow past forecasts in the first quarter.

Banco Santander SA also benefited, with profit in its home market surging 26 percent. But Spain’s largest lender still ended up a loser in this earnings cycle as the euro’s strength eroded income in Latin American markets and profit at its U.K. unit fell 23 percent.



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