Regulatory Burden Eases On European Banks

Significant regulatory forbearance through reduction of Basel leverage exposure and netting provision would considerably help European banks, notes Citi in its recent research report.

Kinner Lakhani and team at Citi Research in their recent report titled “Handover Continues; Regulation Eases” point out that in FICC, there has been a modest shift in market share from European to US banks since 2006.

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Shift in FICC share

The Citi analysts point out that based on their analysis, there has been a modest shift in market share from European banks to US banks of c3pp since 2006 relative to 9M13. The analysts attribute this shift to deleveraging pressures as well as a relatively more challenging macro environment in Europe.

The following table highlights such shift in FICC share:

Shift in FICC share

The Citi analysts anticipate this trend to continue considering the heightened focus on leverage ratios, though this is likely to be offset by gains from greater €-based disintermediation notably benefiting BNP Paribas, Deutsche Bank and SocGen. The analysts observe the FICC market continues to consolidate on overall basis, with the Top 5 gaining c7pp market share since 2006.

As can be deduced from the following graphs, the Citi analysts point out on average, US banks’ 4Q13 EQ revenues increased by 11% year-on-year, while it was down 8% quarter-on-quarter.

Smooth handover from FICC to EQ&Primary

The analysts anticipate continued strength in cash equity trading volumes as well as notable strength in ECM volumes driven by IPOs.

Consolidation driven by regulation

The Citi analysts point out that with continuing industry consolidation, market shares of the Top 5 players increased by c7pp in both FICC and Equities since 2006 respectively. This can be evidenced from the following two tables:

Increase in market share - FICC

Increase in market share- Equities

The analysts point out that in both FICC and Equities, the increase in market share has been driven by retrenchment of smaller players to their core geographies and products, particularly in FICC, or exits. They also note UBS’ significant restructuring of its FICC franchise is likely to be followed by other second-tier global and regional franchises, especially in the context of increasing operational regulatory burdens notably OTC derivatives reform, which could include CASA, CS and RBS.

The Citi analysts point out that the burden of regulation has significantly weighed on the sector, notably wholesale banks. The analysts believe significant regulatory forbearance should alleviate concerns on the leverage ratio over time for Barclays and Deutsche Bank. Moreover, netting provisions should also serve to reduce risks on market liquidity through pressure on repo markets.