Even as competition in global capital markets intensifies, Wall Street banks will likely continue to dominate, says Morningstar DBRS Inc.
In a new report, the firm said that the large, U.S. banks — including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley — continue to outperform their European rivals — such as Barclays plc, BNP Paribas SA, Deutsche Bank AG, and UBS Group AG — in the investment banking and sales and trading businesses.
“The U.S. [banks] remain market leaders globally in capital markets businesses, which we attribute to their larger scale, diversity, and a proven ability to invest in technology and also for future growth in attractive geographies,” it said.
Against that backdrop, the Wall Street banks have generated a return on equity of approximately 10% over the past decade, compared to about 7% for the big European banks, it reported.
“Higher revenue from [investment banking] and trading activities at the U.S. banks has been a primary driver of the profitability gap, along with the burden of restructuring and de-risking faced by some European banks,” it said. Most of the European banks have undergone restructurings, “and intentionally scaled back in certain riskier or less profitable businesses,” it noted.
Many of the large European banks have focused on building their market shares in certain regions or businesses, rather than building their global capabilities, it said — allowing the Wall Street banks to build their global advantage.
At the same time, the U.S. banks have invested in technology that’s proven critically important to building scale in businesses such as trading — where volumes have soared and costs have dropped, the report said — noting that “trading volumes have tripled since 2019, but costs per trade have declined significantly.”
Looking ahead, DBRS said that it expects capital markets competition to ramp up, amid the ongoing growth and diversification of earnings in these businesses — with the large European players strengthening their market positions in certain businesses, “as they further refocus their capital markets franchises and benefit from improved capital positions and earnings generation capacity, allowing greater investment in technology.”
That said, the report also indicated that it doesn’t expect the Wall Street giants to be dethroned in 2026.
The U.S. banks have “an inherent competitive advantage,” it said, given their base in the world’s broadest and deepest capital markets.
“The benefit of a faster recovery after the global financial crisis and a more favourable operating environment provided key support to the market share gains for U.S. institutions,” it said.
At the same time, there remain challenges to building competitive scale at the European banks.
“Even with more consolidation, we believe that it would be difficult to create a bank with sufficient scale to compete with large U.S. banks in fixed income and equity origination, as well as in sales and trading, and this makes European non-retail cross-border mergers less interesting from a business perspective,” it said.