While Wall Street’s big investment banks have been outperforming their European rivals, that gap is expected to narrow over the next couple of years, says Fitch Ratings.
In a new report, the rating agency said it expects the large Wall Street banks to continue to best their European counterparts in the global investment banking business in the short term due to their strong, well-diversified operations and their strength in the U.S. market.
Yet, it also said it believes that the gap between the U.S. and European firms is likely to shrink — largely due to their European firms restructuring progress, as well as their efforts to expand in certain business segments and geographies.
For the big U.S. investment banks, Fitch said it expects their profitability to revert to their average over the 2020–2023 period by 2025, while the European banks are expected to see profits top their historical levels, “partly due to European interest rates likely staying above the ultra-low levels prevalent until 2022” and the payoffs from restructurings at Deutsche Bank, HSBC, Sociéte Generale, and UBS.
At the same time, the European banks’ expansion efforts include “a significant expansion of BNP Paribas’ revenue base in equities, Barclays’ new strategic plan that entails sizeable investments to strengthen its banking franchise, and UBS’s ambitions to capitalize on its integration of Credit Suisse to grow its investment banking footprint in the U.S., so as to support the expansion of its U.S. wealth management business,” the report said.
Fitch also noted that the converging macroeconomic environment between the U.S. and Europe is expected to help close the performance gap in 2025 and 2026.
“The short-term outlook for origination and advisory is positive as deal volumes recover, while lower policy rates should support credit demand,” the report said. “In the longer term, changing investor expectations could spark deleveraging and reduce transaction volumes, which could weigh on trading revenue.”
Additionally, the implementation of the final Basel III capital standards is expected to increase regulatory capital requirements for large banks, levelling the playing field among them too, Fitch said.