What US Bank Earnings Tell US About European Banks

What US Bank Earnings Tell US About European Banks

Reflecting U.S. banks’ strong performance in the recent quarter, Citi analysts feel equity-biased European franchises should outperform.

In their equities coverage, Kinner Lakhani and the team at Citi predict European banks, particularly Credit Suisse Group AG (ADR) (NYSE:CS), Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) and UBS AG (NYSE:UBS) will mirror the strong performance posted by U.S. wholesale banks’ performance on the equities front.

Strong equity trading

Recently, Deutsche bank analysts reviewed the third quarter results of the top five market-sensitive banks / brokers and concluded Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Morgan Stanley (NYSE:MS) posted strong market share revenue growth between 20 and 36% on a year-on-year basis.

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However, Deutsche analysts found all the top five players, including Goldman Sachs Group Inc (NYSEGS) experienced weak market share revenue from FICC, wherein their share declined over 26% in the third quarter on average compared to last year.

Continued FICC weakness

Kinner Lakhani and co. at Citi observe FICC weakness continued from the second quarter, as did the handover from FICC to equities. Citi analysts summarize the U.S. wholesale banks’ performance as shown below:

US Wholesale banks' performance Equity

Citi analysts point out that due to ECB OMT and Fed QE3-driven strength in 3Q12, the U.S. wholesale banks posted 25% reduction in FICC revenues on a year-on-year basis. Weak customer activity and a challenging trading environment, particularly in FX and Rates, dragged q-o-q sequential revenue down by 22%.

However, Citi analysts like European wholesale banks to post slightly better sequential performance with a negative 19% qoq, thanks to relatively weaker 2Q13 performance.

European franchises to outperform

Kinner Lakhani and the Citi team point out that thanks to higher volume and improved risk appetite, particularly in cash equities, U.S. wholesale banks’ equities revenues posted a 21% gain yoy, though they were down by 10% qoq.

Citi analysts anticipate equity-biased franchises in Europe should outperform, particularly CS, SG and UBS, as they offer greatest equities bias.

Providing rationale for their views, Citi analysts point out UBS has the greatest exposure to equities for the least exposure to FICC, while SG offers greater exposure to equities than BNPP for the same exposure to FICC.

Kinner Lakhani and the team at Citi assign overweight on wholesale banks, with their preference for Barclays and BNP Paribas.

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