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European banks need ‘drastic’ reform in face of threat from US rivals

By Marianne Curphey

European banks are struggling and losing out to American banks, claims report from consulting group

European banks need drasticreform and under threat from US competitors

European Corporate and Investment banks (CIBs) need to make “drastic structural changes” to survive at home and on the world stage. Failure to do so will lead to further erosion of their profitability and market share as US banks move into their territory, a new report says.

European CIBs are facing a new wave of tougher capital regulations and the introduction of remuneration caps for management which has led to the loss of top staff.

During the 2018 financial year, overall CIB revenues grew by 3.5 per cent, but by the first quarter of 2019 their core Equities & Prime businesses had fallen by 21.6 per cent. This contributed to a drop of 10 per cent year-on-year in operating revenue.

“With the outlook ahead looking bleak, CIBs, in particularly European CIBs, need to consider structural changes to protect their positions,” the report, from European consulting firm Eurogroup Consulting says. “The ‘war’ between US and Europe CIBs continues, with US CIBs thriving once again whilst banking in Europe, particularly in Investment Banking, is in a sorry state.”

US CIBs have strong competitive advantages compared with their European peers and have access to a very large domestic market. They are more profitable, tend to provide high quality of service, are able to attract talent, and benefit from their regulators consistently taking a pragmatic approach.

As a result, their market share in Europe has increased dramatically, at the expense of local European banks.

European CIBs on the other hand, are currently experiencing one of their most challenging periods. There are a number of reasons for this: revenue growth has stalled due to the increased volatility in the market and low interest rates, and cost reduction programmes are not making up for the falls in revenue.

The report, titled European Corporate and Investment Banking 2019 says European CIBs adopt new business models and embrace digital culture. They also need to be more agile, concentrate on what customers want, and become more efficient.

Among its recommendations, the European consulting firm Eurogroup Consulting says the European banks need to be more agile, concentrate on what customers want, and become more efficient.

“There are numerous constraints on European banks: digital transformation, increased market volatility, historically low interest rates, a new wave of stringent regulation, massive investment in infrastructure, the introduction of pay caps for executives,” it says.

In fact, European banks are struggling and losing out to American banks, which have managed to strengthen their position in Europe, notably by relying on a large domestic market and a more favourable regulatory landscape.

A large majority of European CIBs experienced significant financial difficulties during the 2018 financial year and even the cost reduction programmes put in place do not offset the decline in turnover.

Matthieu Prieuret, Partner of Eurogroup Consulting in London, said: “The future prospects are bleak if European CIBs do not change their model. They must now consider drastic structural changes and address the fundamental constraints that the industry is currently facing by optimising their cost base and revitalising their talent to close the gap with US banks and protect their positions.”

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