It’s been a decade since the global financial crisis and the truly big, global banks still standing are, for the most part, American. Europe’s lenders in particular are still struggling to find their feet, and it doesn’t help that US rivals are steadily encroaching on their turf.
Take JPMorgan: the biggest US bank hired a clutch of bankers to beef up its European commercial banking operations earlier this year. “We continue to think globally,” says Andrew Kresse, head of Corporate Client Banking & Specialized Industries International at JPMorgan. “It’s a luxury and isn’t something that should be taken for granted.”
The New York-based bank is bulking up in places like Frankfurt and Madrid, highlighting the divergence between the US and European banking sectors since the 2008 crisis. American lenders were “ahead in making the bad loans, so to speak, and they’ve been ahead at writing those bad loans off and moving on,” says David Ellison, a portfolio manager at Hennessy Funds, which oversees $4.8 billion in assets.
The US banks have also benefitted from developments outside their control. Their domestic economy returned to health before the one on the other side of the Atlantic. That has a direct benefit for lenders, because it presents more opportunities to lend to creditworthy consumers and companies, and increases the chances they will get paid back.
Stronger economic growth has also translated into higher interest rates. US rates remain low by historical standards, but they are relatively normal compared with the negative interest rates that are now common across Europe. Just about all central banks in developed markets have taken extraordinary measures to prop up economic growth, cutting interest rates to historic lows and buying up trillions of dollars of bonds to keep borrowing costs subdued in the hope that it will spur consumption and investment.
But when rates approach zero, it can dry up the spread between the deposit rates at which banks borrow and the loan rates at which they lend out money. Net interest margin is an important profit engine for lenders, and has given US banks more leeway to spend on technology and talent.
If JPMorgan had been based in Europe for the past 10 years, “I don’t think they would look a lot different” than the region’s lenders, Ellison says.
The new old thing
Two-hundred-year-old JPMorgan’s ramped-up efforts in commercial banking demonstrate how the financial industry has changed over the past decade. The days of rocket scientists transforming risky mortgages into complex financial instruments that banks could package and sell all over the world are pretty much over. Now, one of the fastest-growing businesses for banks is the less sexy task of managing their customers’ piles of cash.
Cash management and treasury is, however, lucrative. The banks’ job is to help their clients move and exchange money around the world as cheaply and quickly as possible. That means helping corporations optimize their working capital, cutting down the time it takes for them to get paid by customers, or extending the amount of time they take to pay suppliers. It’s complex and requires a lot of local legal and regulatory expertise. Unlike trading and riskier business lines, it doesn’t necessarily require the bank to set a bunch of capital against it, which eats into profit margins.
Revenue from this sector is growing faster than from dealmaking and trading in equities, bonds, commodities, and currencies (that is, the core services of investment banking). Treasury and cash management revenue increased 9% last year, according to Coalition data. By comparison, investment banking revenue rose 2%, and shrank the previous year, according to a report by Moody’s Investors Service.
JPMorgan isn’t alone in its drive to boost cash management revenue. Goldman Sachs hired 100 people in February to make a cash management push, according to the Financial Times (paywall). Although Deutsche Bank has been cutting back in some areas, slashing a fifth of its workforce and curtailing its investment banking and trading units, it is refocusing its efforts on cash management and treasury on its home turf in Europe, putting it on a collision course with JPMorgan.
The bankers JPMorgan is hiring abroad are typically locals, and they’ve likely worked for domestic banks with long-established roots in those markets. As one of the few remaining global universal banks—it does everything from consumer deposits to deal making and trading—JPMorgan can pitch clients on its worldwide reach and breadth of offerings. For customers that are considering expanding in the US, JPMorgan and its ilk can tout their own home-market expertise.
“At the end of the day, banking is local and it’s relationship based,” JPMorgan’s Kresse says. “Culture and all of those things are very important. We’ve got to be a bank that feels local, but has global capabilities.”
Does size matter?
American banks are likely to remain the biggest global players because the US market is more unified. There is still a relative lack of harmony in regulation between European countries, each of which has its own institutions responsible for bailing out domestic financial firms when crisis strikes.
EU regulators would like that to change, creating a “a proper true banking union,” says Francesc Rodriguez Tous, a finance professor at Cass Business School who has worked at central banks in the UK, Germany, and Spain. This could help capital and commerce move efficiently across the bloc’s large single market. It’s not clear how to achieve this, given that local interests are strong and difficult to overcome. BNP Paribas is seen as a French bank, not a European one.
But is size that important? Rodriguez Tous and other researchers aren’t convinced that big, diversified financial conglomerates are more competitive. That said, a few large American banks appear to be making it work. JPMorgan, Bank of America, and Citigroup rely less on capital markets, a fickle money-maker, as percentage of total revenue than others, while also spinning off more revenue, according to Moody’s. Instead of paring it down, Goldman is diversifying its business, pushing into retail banking for the first time in its history.
Still, there is pressure to pick apart, or unbundle, the pieces that comprise a universal bank, driven by specialist upstarts focused on specific business lines. Algorithmic trading firms are taking aim at brokers’ business for buying and selling financial assets, for example, while independent investment banks like Evercore win mandates to advise on blockbuster mergers and acquisitions as regularly as established Wall Street giants.
“It is something you absolutely have to recognize and pay attention to, and to understand that most industry disrupters are focused on that,” Kresse says of the pressures of unbundling. “Bundling should be a benefit where the total is better than the sum of the parts.”