Global banks are in a phased retreat from the European equity brokerage business, and retrenchment on the part of brokers could result in some tough choices ahead for European institutional investors, according to Greenwich Associates.
In this difficult environment for brokers, UBS has secured the top spot in European institutional equity trading market share, maintaining a narrow lead over a trio of competitors tied for second place, while Deutsche Bank beat out rivals to claim the title of leading provider of institutional equity research.
Sell-side firms are recalibrating their approaches to this core business in the face of a pronounced and prolonged contraction in revenues generated through European equity trading.
The amount of commissions paid by institutional investors to brokers on trades of European equities — the driver of equity broker revenues — has been in decline for the past several years. From Q1 2009 to Q1 2012 the institutional commission pool contracted by over 25 per cent on a pan-European basis. Looking ahead, institutions participating in the annual Greenwich Associates European Equities Investors Study predicted that the commission pool would be flat for calendar year 2012. However, soft equity trading volumes in the first six months of the year and conversations with disappointed brokers suggest the pool will shrink markedly further.
“The contraction in equity commission and broker trading revenue is the result of three market developments: de-risking of institutional investment portfolios, the economic recession in Europe and the European sovereign debt crisis, the last of which has prompted institutions to keep money on the sidelines, limiting trading activity,” says Greenwich Associates consultant Jay Bennett.
Global brokerage houses have responded to this market deceleration by downsizing European equity operations — but these reductions have been modest in relation to the magnitude of the decline in trading revenues. Brokers have reduced headcount, consolidated desks and otherwise moved to take out costs.
“To this point however, they’ve been pruning around the edges,” says Greenwich Associates consultant John Colon. “But if things continue on this track, at some point they’ll have to move from giving up fingers and toes to arms and legs.”
There are two main reasons why European and global banks have to this point resisted deep cuts to European equity businesses. First, trading and research capabilities in European equities are viewed as important sources of market knowledge and intellectual capital that is leveraged in capital markets origination, mergers and acquisitions and other high-margin businesses.
“People will stay the course in equities much longer than you might expect based strictly on profitability,” says Jay Bennett. “To some extent, pulling back from European equities is admitting defeat in investment banking generally.”
However, from a strategic perspective, some of the world’s biggest sell-side firms have lowered their sights, giving up on the goal of winning market share and securing a place as a leader in European equities.
“If your investment banking franchise is strong and your C-level relationships are solid, you don’t need to be on top; you only need a capability sufficient to support your other activities,” says Colon.
The second reason that global banks have avoided deep cuts in European equity capabilities: In an era of restrictive capital requirements, equity trading is viewed as a highly attractive business. Many banks are betting that the market will recover from what they hope to be a cyclical slowdown and re-emerge as an important, non-capital-intensive profit centre.
“There is no doubt that many banks are maintaining staffing levels above what the current business would dictate in anticipation of a recovery,” says Bennett. “They see all this money on the sidelines, they see the miniscule returns investors are getting in fixed income and they conclude that, eventually, risk appetite will have to return.”
UBS tops all brokers this year with a market share in European institutional equity trading of 10.5 per cent. UBS is followed by Credit Suisse, Deutsche Bank and Morgan Stanley, all of which are essentially tied for second place with market shares of 9.4 per cent-9.9 per cent. Rounding out the top five is Bank of America Morgan Stanley at 9.2 per cent. These firms are the 2012 Greenwich Share Leaders in European Equity Trading. The same five firms have differentiated themselves from competitors in quality ratings from clients and have been named 2012 Greenwich Quality Leaders in European Equity Trading.
In European equity research, Deutsche Bank takes the top spot with a 9.8 per cent share in the voting process by which institutions rank research providers for payment with trading volumes. Deutsche Bank is followed by three providers essentially tied for second place: UBS at 9.0 per cent, Morgan Stanley at 8.6 per cent, and Bank of America Merrill Lynch at 8.5 per cent. Rounding out the top five are J.P. Morgan at 6.7 per cent and Credit Suisse at 6.6 per cent. These firms are the 2012 Greenwich Share Leaders in European Equity Research. The 2012 Greenwich Quality Leaders in European Equity Research and Analyst Quality are (in alphabetical order) Bank of America Merrill Lynch, Morgan Stanley and UBS.
