With the U.S. economy firing-up thanks to Trump’s spending plans and U.S. trading revenues increasing thanks to anticipated rate rises, European banks can be expected to go for growth in the U.S. in 2017. Not all banks are equally well-placed to achieve it, however.
A new report from Deutsche Bank’s banking analysts suggests every European bank on Wall Street has its problems and that some have more than others. If you’re thinking of going European, this is what you need to be aware of.
1. Barclays’ U.S. business looks low on capital
European banks on Wall Street have capital issues. Last July, international banks in the U.S. were compelled to create new intermediate holding companies (IHCs). These IHCs submitted their capital plans privately to the Federal Reserve last month and will have their results to U.S. stress tests disclosed by mid-2018. Many look ill-prepared.
UBS, Credit Suisse and Barclays are all thought to have shifted capital to their U.S. operations at the end of 2016, but Barclays still looks under-capitalized compared to peers. The British bank’s position will worsen if the bank’s fight with the U.S. department of Justice (over mis-sold mortgage securities before the financial crisis) ends in a substantial fine.
Of course, Barclays could always increase the core equity tier one (CET1) capital ratio at its U.S. holding company by cutting its risk-weighted assets. This might mean curtailing its U.S. trading aspirations though…
Core equity tier one capital ratio in U.S. IHCs, 2016
Source: Deutsche Bank
2. Credit Suisse and UBS are making a loss in the U.S., despite pouring resources into their U.S. businesses
If Barclays is low on capital in the U.S., it is at least profitable. This is more than can be said for Credit Suisse, whose U.S. operations made a loss last year. Although UBS looks like it’s making a profit on the chart below, Deutsche’s analysts note that this is illusory: UBS’s 2016 profitability in the U.S. was, “based on tax write-backs.”
U.S. IHCs, cost to income ratio, 2016
Source: Deutsche Bank
The U.S. losses at Credit Suisse and UBS look especially unfortunate when you consider that the Swiss banks have invested a high proportion of their group core equity tier one capital in their U.S. businesses. At Credit Suisse, in particular, over 50% of capital is held in the loss-making U.S. IHC. Deutsche is predicting a “right-sizing” of Credit Suisse’s U.S. ambitions as a result. Hard choices are coming for Credit Suisse CEO Tidjane Thiam; jobs that exist at the U.S. bank today could be gone tomorrow…
U.S. IHCs, core equity tier one capital ratio as a % of the group core equity tier one capital ratio
Source: Deutsche Bank
3. Credit Suisse and HSBC are far from covering their U.S. cost of equity
The return on equity at Credit Suisse and HSBC’s U.S. businesses is miserable. Neither business looks sustainable.
US IHC – Return on Tangible Equity – 2016
4. The best bets look like… Barclays and BNP Paribas
Capital concerns aside, Deutsche’s analysts think the healthiest European banks in the U.S. are therefore Barclays and BNP Paribas. Japanese bank Mitsubishi UFJ also ranks among the strongest international banks on Wall Street. Predictably, Deutsche Bank doesn’t touch upon its own issues in the U.S. market, which were particularly acute when Bernstein took a look last year.
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Contact: sbutcher@efinancialcareers.com
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Photo credit: Looking up Wall Street by Richard Schneider is licensed under CC BY 2.0.