Wholesale markets cast long shadow over investment banks

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Wholesale markets are expected to continue being extremely tough for European and U.S. investment banks, as the forthcoming earnings season is likely to reveal.

Poor figures seen in the fourth quarter of last year are expected to continue into the first quarter of 2016, depressing investment banks' profits.

Little appears to have changed since fourth quarter 2015, with its cyclical headwinds of slow growth, disruption in emerging markets and low interest rate as outlined by Goldman Sachs CEO Lloyd Blankfein in February. "This is a sober time for everybody," he said.

A new analysis from S&P Global Market Intelligence emphasizes the difficulties faced by European and U.S. investment banks and shows why Blankfein is not alone in his concern.

However, U.S. banks' outperformance over European peers in this area will likely continue. It may be due increasingly to regulation that favors U.S. banks given their better leverage ratios and stronger domestic economy, Société Générale analysts suggested in a January note. Moreover, the analysts expected European banks to shrink their fixed-income, currencies and commodities businesses relative to equities.

This has happened with some visible success at UBS Group AG and is being undertaken at some cost by Credit Suisse Group AG.

Deutsche Bank AG appears to be one of the few European investment banks resisting this trend although it is cutting selectively. The German bank has said it wants to reduce risk-weighted assets by 20% by 2020 partly to offset regulatory compliance costs and to bolster its leverage ratio. Like other banks, it is strengthening its position in equities. Yet equities were not encouraging for it in the fourth quarter.

FICC, equities income at European, US banks

S&P Global Market Intelligence: Wholesale markets cast long shadow over i-banks in 2016

Source: S&P Global Market Intelligence

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