European investment banks are well placed to compete for a bigger share of sector revenues in 2024 after strengthening their positions in key markets in recent years.

While bulge-bracket US firms are set to remain global market leaders, European players are now well-placed to regain sector market share lost since 2008 thanks to yearslong restructuring and repositioning of their investment bank divisions, market observers said.

European banks are now "leaner, stronger, higher-returning and much more focused on areas of competitive advantage," Ronan O'Kelly, head of corporate and institutional banking in Europe for Oliver Wyman, said in an interview. "We think that gives them a good platform for growth."

US banks remain "formidable competitors," with scale, reach and balanced business models, yet the current environment, with higher interest rates and more stringent capital rules coming in the US, presents an interesting opportunity for European banks to gain market share and the good return levels achieved in recent years, O'Kelly said.

Prospects for growth

Thanks to rate hikes in 2022 and 2023, European banks have already gained share in net interest income-sensitive businesses, particularly transaction banking, O'Kelly said.

The Basel III endgame reforms in the US could provide another opportunity "on the margins" for European banks to gain share, mainly in equities and fixed income trading, O'Kelly said. Based on the current proposal, US banks would see a risk-weighted asset (RWA) increase of 35% versus 15% for European peers, Oliver Wyman estimates show. Even if watered down, the endgame reforms would result in more stringent rules for US banks, O'Kelly said.

The area where European banks aim to grow in the near term is in investment banking division (IBD) operations, which comprise their advisory, debt capital markets (DCM) and equity capital markets (ECM) businesses. Most leading European investment banks booked year-over-year growth in IBD revenues in 2023, while US peers posted declines amid a global M&A and IPO slump, data compiled by S&P Global Market Intelligence shows.

BNP Paribas SA, Deutsche Bank AG and UBS Group AG have all said they aim to grow IBD market share in the next few years with M&A and capital markets activity expected to start rebounding in 2024. Bulge-bracket US firms have lost some IBD market share since 2020, which gives European players a chance "to stage a comeback" and capture that share when activity picks up, Deloitte said in a 2024 sector outlook report.

US banks are typically stronger in IBD, which remains a highly competitive market; yet there are still plenty of opportunities for European banks to grow and gain share within this area of business, O'Kelly said.

Oliver Wyman estimates show IBD revenues would see strong growth in 2024 and 2025 in a base case, "soft landing" economic scenario, which assumes inflation is reduced without any major economies going into deep recession or any major shocks to asset prices or credit markets. In a "no landing" scenario where inflation does not go down and interest rates stay higher for longer, there would also be some growth.

In a worst-case, "hard landing" scenario, which assumes recessions in one or more major economies, there would be a decline in IBD revenues in 2024 of 5%, followed by a strong rebound in 2025, the estimates show.

Areas of strength

By business and on a global basis, DCM is the area where European banks are showing more progress in recent years, Maria Rivas, senior vice president of global financial institutions at Morningstar DBRS said. The banks' repositioning since the global financial crisis has also become more visible in their IBD business in Europe, the Middle East and Africa, with many key players climbing the ranks in industry league tables, Rivas said.

BNP Paribas, UBS and HSBC Holdings PLC rose both in rank and market share in EMEA in 2023 versus 2019, while the five US banks — Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley — appear to have lost a significant part of the share they held in EMEA investment banking in 2019, Rivas said. Similar to global rankings, European banks have seen the most improvement in DCM in EMEA, Rivas said.

London Stock Exchange data paints a similar picture of some European banks rising in global and domestic IBD revenue rankings in recent years with particular gains in DCM. Barclays moved to sixth in 2023 from seventh in 2020, BNP Paribas moved to ninth from 10th, and UBS jumped to seventh from 13th, thanks partly to the Credit Suisse Group AG acquisition in early 2023. In Europe, BNP Paribas took second place in IBD in 2023 from third in 2020, displacing Goldman Sachs, and has been the European leader in DCM revenues since 2020, LSE ranking data shows.

HSBC, Barclays and BNP Paribas have booked the largest number of DCM transactions globally among major European investment banks over the past five years, measuring up to US peers Morgan Stanley and Goldman Sachs, Market Intelligence data shows.

The recent IBD market share gains in EMEA, as well as potential further revenue growth, is due more to European banks regaining market share that they lost over the years rather than winning new ground, according to Rivas. US banks grew in EMEA investment banking in the years after the crisis when their European peers were in deep restructuring with negative interest rates pressuring profits and higher capital requirements constraining growth, Rivas said. European banks are now in a stronger fundamental position and benefiting from improved earnings generation amid the higher interest rate environment, the analyst noted.

Winning strategies

European banks have been under pressure to downsize their corporate and investment bank (CIB) arms for years, with Barclays most recently facing investor ire over its CIB strategy. CEO C. S. Venkatakrishnan has said Barclays is at the right scale to compete with US rivals and does not need to downsize its investment bank but vowed to keep RWAs allocated to the unit stable in the next few years to boost investor returns.

The key issues investors have with CIB divisions are lower returns and volatility of earnings compared to those in other units like wealth management, commercial or retail banking, O'Kelly said.

– Compare banks using the Peer Analysis template on CapIQPro. – Access segment analysis, including investment banking earnings breakdown, for BNP Paribas, Deutsche Bank and UBS on CapIQPro.

"We can't escape the overall challenge of capital allocation to CIB divisions. Until [they] can systematically deliver returns well above midteens, investors will look for capital to be capped, whether it's 50% or a third of group RWAs, and allocated to other parts of the business," O'Kelly noted.

It makes sense for banks to focus on a diversified mix of businesses that perform at different points in the cycle as this could deliver higher returns at a lower earnings volatility, the consultant said.

Banks who "tell a better story" about the role of the CIB divisions in driving growth in other business units tend to perform better with investors, O'Kelly noted. "Those are not stand-alone businesses. There's a huge amount of CIB capability that underpins value creation, either execution for wealth management clients or [foreign exchange] capability for retail and commercial banking clients," O'Kelly said.