Société Générale Markets | We remain cautious about the Investment Bank sector, with estimated decline in incomes of -9% in 2019, followed by stabilisation in the next two years. Our estimates of EPS are generally below the consensus.
Strategic errors in the efforts of European actors to confront the war launched by their US competitors have exacerbated the competitive environment in which they operate. The CET1 levers are too weak, which limits the potential for growth and economies of scale. In general, the allotment of capital was deficient, in particular for Deutsche Bank, BNPP and Barclays. In this context, managing the volatility of incomes from CIB is more complicated for European banks due to the lack of flexibility in costs compared to US banks. They have too many deferred bonds to assume and are subject to costly employment regulations.
We suggest that the banks take specific measures to improve profits, ROTE and the long term sustainability of their franchises, including 1) the construction of higher capital ratios, maintaining more results and reducing exposure to more profitable activities; 2) assign more capital to more profitable activities; 3) increase the proportion of staff in more “Anglo-Saxon mode” or “Swiss mode” to reduce redundancy costs, through contracting more people in London, the US, Dublin and Switzerland; 4) reduce deferred bonds to better manage volatility in quarterly profits.
We reduce our O.P. for UBS from 10.5SF to 9.6SF to take account of the macro scene.