This is the week that Europe's investment banks report their second quarter results: in the next few days UBS, Deutsche Bank, BNP Paribas and Credit Suisse are all due to publish achievements between March and June. When they do, it looks likely that they'll reveal intensifying cost pressures in their investment banks.
Brexit bounce or not, the first half of this year has not been kind to most businesses of most investment banks. In equities sales and trading, equity capital markets and debt capital markets, most US investment banks (and Goldman Sachs especially) saw revenues dive. Only M&A bankers have seen a solid revenue increase this year, and the outlook for the remainder of 2016 for advisory businesses is not great.
Declining revenues have had a predictable impact on US banks' cost ratios. While J.P. Morgan, Goldman Sachs and Bank of America more or less successfully adjusted costs to match the lower revenue environment, Citi and Morgan Stanley both saw costs consume an increased proportion of their top lines.
This doesn't bode well for the investment banks of Europe. As the chart below, for the first quarter of 2016, shows, many were already struggling with all-consuming costs even before this year's revenue fell of a cliff.
Needless to say, most European banks already have cost cutting plans in place. The question now is whether they are sufficient. Some banking analysts are already expressing doubts: "Cost cutting is the only thing they [European banks] can do,” Gary Greenwood, an analyst at Shore Capital, said to Bloomberg. “It’s the only thing in their control.”
It looks like European banks will need to cut more jobs, or more pay. Or both.