Europe-US banking When Two Worlds Collide

US banks are again reaping record profits, while their European peers are still reeling from the 2008 financial crisis. Staff are jumping ship, and Manhattan is booming.
Standing tall: Workers at Bank of America's headquarters in Charlotte, North carolina, have little to worry about.

Armin von Falkenhayn is familiar with both the American and the European side of the banking business. He was with Deutsche Bank for 25 years, serving as the assistant to former Chief Executive Josef Ackermann and, most recently, as head of investment banking in Germany.

He would have continued on his career trajectory if the bank had not been restructured and its investment business slashed in 2014, after which Mr. Falkenhayn looked for greener pastures. A year later, he was appointed head of German operations at Bank of America in Frankfurt.

Things are going well for him and the bank, extremely well in fact. After the financial crisis, the bank only played a secondary role in Germany, but things have been moving sharply uphill in recent years. Bank of America has been involved in almost all major German transactions, including chemical giant Bayer's acquisition of seed producer Monsanto, the merger of gas suppliers Linde and Praxair, and the recent failed tie-up of the London Stock Exchange and Deutsche Börse. America’s second-largest bank is capturing the German investment bank business bit by bit.

The 10 largest US banks by assets earned a combined €116.3 billion ($127 billion) in 2016, while the 10 largest European banks made no more than €24.5 billion.

It's not alone. Only recently, Jörg Kukies, the German co-CEO of Goldman Sachs, announced that the bank would use its strong capital base to gain market share in Germany. Similar musings have been heard at Morgan Stanley, JP Morgan and Citi. While European banks are busy cutting costs, their US counterparts are seizing the moment to target and recruit top personnel.

Last year the Brussels-based think tank Bruegel calculated that US banks increased their European market share from 37 to 45 percent between 2005 and 2015. They now hold close to two-thirds of the global market. Meanwhile, the European part of the industry is wasting away. Deutsche Bank? Credit Suisse? Barclays? They hardly stand a chance against JP Morgan, Goldman Sachs and the like, especially in the lucrative investment banking segment.

The 10 largest US banks by assets earned a combined €116.3 billion ($127 billion) in 2016, while the 10 largest European banks made no more than €24.5 billion. And the latest figures suggest European banks are unlikely to close the gap. At JP Morgan, the consolidated profit in the first quarter of 2017 increased by 17 percent compared to the same period last year, to $6.4 billion, while Goldman Sachs doubled its profit in the same period, to $2.4 billion. Bank of America also did extremely well, with its consolidated profit increasing by a healthy 44 percent to $4.35 billion.

For years, industry representatives like Deutsche Bank Chairman Paul Achleitner have warned against US dominance in global capital markets. "We have to admit without any envy that the preconditions for US banks are significantly better for European banks,” Mr. Achleitner said in March.

US banks benefit from the fact that they decisively eliminated their legacy positions and rebuilt their capital cushions after the 2008 financial crisis. "The United States was faster and bolder than the Europeans in this respect," said Shannon Stemm, an equities analyst for investment firm Edward Jones. "Now the banks are reaping the rewards for their troubles,” she said, adding that she believed the party on Wall Street is far from over.

Unless European bankers and regulators quickly come up with a response to the onslaught from the United States, Europe's financial institutions threaten to be left behind once and for all.

Jan Schildbach first described the growing gap in a 2013 study. As an economist at Deutsche Bank, his interest in the subject is certainly more than purely academic. The data unmistakably points to the fact that the gap between banks in the United States and Europe has widened even further recently.

While several European banks are still struggling with legacy legal problems and mountains of bad loans, American lenders have largely eliminated these problems and are also benefiting from significantly better underlying conditions.

After years of decline, lending in Europe has only grown by a small amount recently, whereas it has increased substantially in the United States. The mood across the pond is also significantly more optimistic. "Investors currently expect that US banks will benefit from an economic stimulus program, lower taxes and deregulation," said Mr. Schildbach. US bank shares, already highly valued to begin with, have been on a rally since the election of President Donald Trump and only took a slight hit when the president floated the idea of breaking up big banks.

Business in investment banking has also picked up since 2016. In the first three months of this year, banks worldwide earned fees totalling $24 billion, a 26-percent increase over the first quarter of the previous year. The boost was especially strong in the United States, where revenues increased by 37 percent. In the first quarter, large US banks occupied the top five positions in global investment banking, with a European bank, Barclays, ranking sixth.

And the best times lie ahead for US banks. Mr. Trump has announced his intention to review the Dodd-Frank Act, a legislative package enacted after the crisis that barred banks from trading for their own accounts and introduced strict capital requirements.

It takes Mr. Falkenhayn of Bank of America just a few minutes to sketch the market. International investors are looking to Europe with greater optimism, financing is cheap, and companies are fundamentally strong, having delivered convincing results almost consistently in recent quarters. Only political risks and staunch antitrust watchdogs could significantly curb the business. "The outlook is positive, and the dynamic will continue," Mr. Falkenhayn predicts.

He has set his goals accordingly. In the medium term, he wants the bank to be among the top three in Germany in all relevant fields of business, even though it serves only a narrowly targeted group of customers.

German customers appear to embrace the Americans' entry. Apparently most companies believe that the risks of political influence or a return to a crisis period are low. Bankers report that only a few companies are deliberately hiring European lenders to ensure a geographic balance.

Instead, they hope to benefit from the fact that the US banks make a much stronger impression than their European counterparts. "The banks removed their legacy positions faster and more consistently, are benefiting from stronger growth and, currently, from rising interest rates," said Mr. Falkenhayn. Rising interest rates are likely to have a more positive impact on results in the medium term than the prospect of regulation cuts.

After all, rising interest rates even make the traditional banking business of loans and savings deposits lucrative. And the US banks can also put the additional revenue to use in other areas, such as technological development. "They have saved up enough money to shape the technical transformation," said analyst Mr. Stemm.

While Deutsche Bank, Germany's largest lender, is still busy fixing past escapades and is painstakingly saving its way out of the yield crisis, JP Morgan and Bank of America are investing billions in the technologies of the future. Technological advances are also tied to cost savings, allowing banks to close more branches if customers switch to online or mobile applications. "Digitalization will lead to a concentration of the market, which will benefit big banks," said Ms. Stemm.

Wall Street bankers are back to popping the champagne corks – literally. "Expensive parties with escorts who charge $1,000 to $2,000 a night are taking place on a weekly basis again," a New York investment banker who works for one of the top firms said.

Real estate prices in Manhattan are feeling the boom. While it was mainly foreign investors that purchased expensive property during the bust years following the crisis in 2008, US citizens are returning to the most high-priced housing segments. And prices immediately bounced back. The most expensive 10 percent of Manhattan property cost around $3 million in 2010; today New York’s richest have to fork over $4.5 to $5 million to own a piece of prime real estate.

The big crisis is forgotten and has finally been ticked off – until the next time, that is.


This article originally appeared in the business magazine WirtschaftsWoche. To contact the authors: [email protected]