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No end in sight for Europe's investment banking malaise: Gadfly

The bar is low for Europe's investment banks as earnings season begins. They could still set a disappointing tone.

[LONDON] The bar is low for Europe's investment banks as earnings season begins. They could still set a disappointing tone.

The major US investment banks have already reported their numbers - revenue was more or less flat across the group. That doesn't bode well for the Europeans, who have struggled to compete against their US peers in recent years.

The dour mood is also baked in after Deutsche Bank and Barclays last week warned that performance would fall short of earlier expectations. Deutsche Bank said last week revenue fell to 6.6 billion euros in the fourth quarter, 15 per cent less than what analysts had estimated. Barclays said investment banking revenue for 2015 was "broadly flat" from the previous year, implying it fell 11 per cent in the fourth-quarter. Both banks said tough markets were the main culprit.

Overall, revenue at UBS, Credit Suisse, Deutsche and Barclays will fall by double digit per centages in dollar terms, analysts from Citigroup estimate.

But is there cause for optimism in 2016? Trading activity across asset classes has picked up in the first few weeks of January, with interest rate trading volume jumping 26 per cent from the year-earlier period, analysts from Barclays note. This is a welcome fillip for a business that has seen a steadily downward trend in recent years. But it's hardly the mark of a turnaround.

Greater trading volumes don't necessarily translate into much higher revenue, and a rebound of just a few weeks doesn't yet look sustainable.

There's good reason to think the outlook for the year ahead could be even worse. While trading is a known problem, other investment banking businesses are off to a poor start this year.

And though it's just as unsafe to spot long term trends here as in a few weeks of trading volume data, there are signs the banks' corporate clients are holding off on transactions amid volatile debt and equity markets.

Share sales in Europe, the Middle East and Africa are down 81 per cent so far this year from the same period in 2015, according to Bloomberg data. In the first three weeks of January, announced mergers were down 35 per cent, while debt issuance fell 22 per cent, according to analysts from Barclays.

Outside of investment banking, Europe's lackluster economic growth could weigh on consumer-oriented businesses, while further litigation and conduct charges can't be ruled out.

At Deutsche, Barclays and Credit Suisse, large scale restructuring efforts led by new CEOs are also likely to lead to charges that drag on results for some time.

In the long term, those efforts could pay off. In the meantime, the outlook still looks grim.