Mixed Q4 damps Europe investment bank 2011 hopes

* Analysts see modest Q4 improvement at best

* Euro zone crisis, Basel III to weigh on 2011 revenues

* Job losses, asset sales likely

By Sarah White

LONDON, Dec 7 (BestGrowthStock) – Europe’s investment banks may show
a modest recovery in the fourth quarter, yet fears are growing
that 2011 will be another tough year as regulatory pressures
continue to weigh on the industry.

Analysts forecast a modest improvement at best for the last
three months of the year after depressed trading volumes led to
a difficult third quarter.

Capital markets activity has remained muted as sovereign
debt fears across the euro zone have left equity investors
sidelined while spurts in trading volumes, driven by volatility,
have been patchy.

This situation is likely to remain a drag on revenues well
into next year, limiting the scale of any recovery despite an
expected pick-up in equities business, analysts said.

Barclays Capital analysts expect European investment bank
revenues will rise 2 percent in 2011, with fixed income trading,
a big profit driver in 2009, down 3 percent.

Other analysts expect total investment banking revenues will
rise between 5 and 10 percent next year, seen as weak given the
poor performance so far this year.

More stringent capital requirements under the new global
Basel III rules will also take a toll, forcing banks to pay more
attention to returns and shed assets that carry a higher risk
weighting.

“The massive increase in risk-weighted assets (RWAs) will
bring a lot of limitations on revenue, and on top of everything
you are going to have very little activity in key areas,” said
Arturo de Frias, an analyst at Evolution Securities in London.

Evolution estimates the banks it covers have 380 billion
euros in RWAs to mitigate — by cutting securitisation
exposures, shedding other assets in leveraged finance and
commercial real estate, or opting for exchange-traded instead of
over-the-counter derivatives. [ID:nLDE69A0IN]

YEAR-END STRUGGLE

Analysts say revenues in the fourth quarter should show a
slim rise from the previous three months — especially if the
euro zone crisis delays the traditional year-end slowdown.

Barclays Capital (BARC.L: ), for example, said at a trading
update on Nov. 9 activity in October had been in line with the
third quarter but November had started better.

Jon Peace, a banking analyst at Nomura, said he saw a fourth
quarter recovery compared with a dismal July and August, citing
evidence of stronger trading volumes in November from the likes
of German stock exchange operator Deustche Boerse (DB1Gn.DE: ).

“The current currency volatility has been good for FICC
(fixed income, currency and commodities) volumes, where revenues
should be up quarter on quarter,” Peace said.

Switzerland’s UBS (UBSN.VX: ) slumped to a shock loss in the
third quarter and rivals also failed to recover from a slow
second quarter. Rival BarCap fared better than many, but the
bank still saw its FICC top-line income down 14 percent on the
quarter.

The hope now is that a pick-up in equities activity will
carry on into the new year, after a string of hefty initial
public offerings (IPOs) and share sales in the fourth quarter,
such as Danish telecom firm TDC’s (TDC.CO: ) $2.4 billion share
offering.

Analysts at JPMorgan predict equity derivatives will be key
revenue drivers in 2011, benefiting Credit Suisse (CSGN.VX: ) and
UBS in Europe.

A sluggish end to the year and regulatory pressure will
force banks to reassess staffing levels after many hired
aggressively when business picked up in 2009.

“I would not be surprised if we saw further layoffs,” Peace
said. “Headcount would not have risen as much if banks had known
how much revenues would be squeezed this year.”

More job losses are expected to follow after Barclays
Capital said it plans to shed staff in the new year.
[ID:nLDE6B01HF]
(Editing by Una Galani)

Mixed Q4 damps Europe investment bank 2011 hopes