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Brexit widens chasm between Wall Street and Europe's investment banks

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Market ructions caused by Britain's decision to leave the European Union are set to widen the gulf between Wall Street and European investment banks, potentially leaving the continent without its own global champion.

[LONDON] Market ructions caused by Britain's decision to leave the European Union are set to widen the gulf between Wall Street and European investment banks, potentially leaving the continent without its own global champion.

The Brexit vote has pushed shares in Deutsche Bank and Credit Suisse to record lows and triggered a string of analyst downgrades, highlighting expectations that Europe's already-struggling investment banks will be pushed further to the sidelines by their US counterparts.

"In our view, the uncertainty created post Brexit, if it leads to long-term negative impact on profitability, could result in further restructuring in Tier Two investment banks," JPMorgan analysts wrote in a note on July 11, downgrading their estimates for European banks in favour of their US rivals.

Brexit is seen as a negative for banks on both sides of the Atlantic because the uncertainty could subdue dealmaking and trading activity. And banks may also face the cost of relocating some London-based businesses and staff to other EU cities.

But European banks will find it tougher as Brexit comes on top of post-financial crisis structural overhauls that their US counterparts have largely completed.

Since Britain's vote to leave the European Union, some headhunters on Wall Street have reported getting more calls from investment bankers at European groups asking about jobs at their US rivals.

"People I've been in discussion with since the middle of last year have all of a sudden started saying 'you were right ... I should be more open-minded ... I don't want to be the last guy here to turn the lights off. Is it too late in the year to move?' Gary Goldstein, founder and CEO of executive search firm Whitney Partners in New York, said.

Europe's banks were already on the back foot before the vote, focused on cost-cutting and shoring up capital while more strongly-capitalised US banks have been able to go out to win new business.

"We have been getting a number of calls from senior bankers at the European institutions in the US," Kevin Mahoney at Bay Street Advisors, LLC, said. "The concerns range from the European banks' inability to lend, and thus compete on deals going forward, to the quickly eroding value of their stock awards and overall compensation."

Some senior executives, worried about the risks of Wall Street dominating the region, argue that Europe needs its own investment banks to service companies at home and abroad and help to spur economic growth.

"It is in the interests of Europe at large to have a strong, globally relevant bank in Europe," Alasdair Warren, head of corporate and investment banking EMEA at Deutsche Bank told Reuters. "If the only globally relevant banks of scale are North American, it's not politically or socially good for Europe. But of course, all institutions, irrespective of geography need to be globally competitive."

Barclays' chief executive Jes Staley said earlier this year that the region risked tipping over into American dominance, which could leave Europe's capital markets entirely dependent on firms based elsewhere.

European companies could also play a role in supporting their home banks. In a research paper in March, think-tank Bruegel said companies could help to bolster the continent's investment banks.

"We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in otherwise US- dominated banking syndicates," the paper said. "That could help to avoid complete dependence on US investment banks."

In 2007, the eight biggest European banks' FICC (fixed income, currencies and commodities) revenue was US$48 billion, compared with the US$38 billion generated by the five biggest US banks, according to data from analytics firm Tricumen.

Last year, European banks' revenue was US$26 billion while US banks was US$43 billion. In eight years, there has been a US$22 billion fall in FICC revenue at European banks and a US$5 billion increase at US banks. Europe's 26 per cent advantage has turned into a 40 per cent deficit.

European banks' total fee revenue from bond issuance, equity capital markets and mergers and acquisitions (M&A) fell from US$17 billion to US$13 billion between 2007 and 2015, while US banks'fees remained unchanged at US$23 billion.

"I would expect European banks to lose more market share to the US banks," Darko Kapoor a partner at Tricumen, said.

The Wall Street banks potentially face some big Brexit costs.

The five largest US banks employ around 40,000 people in London, more than in the rest of Europe combined, taking advantage of the EU "passporting" regime that allows them to offer services across the bloc.

If they have to set up new continental European outposts this could be extremely costly.

It could cost 50,000 pounds (S$88,508) per person, on average to relocate an employee to the EU, according to consultancy Crossbridge, taking into account the costs of hiring and redundancy, new building, rent and other infrastructure and contingency costs.

US investment banks have 20 per cent more EMEA (Europe, Middle East and Africa) staff in Britain than their European counterparts, according to industry analytics firm Coalition.

"Most banks (US and European) have put in place a hiring freeze and are following a "wait and watch" approach. Some banks that had launched restructuring before Brexit are looking at accelerating those programs," Coalition said.