Brexit boost eludes Europe's investment banks, shows growing gap with Wall Street

* European FICC down 6.2 pct y/y

* U.S. FICC up 21 pct y/y

* Further cost cuts loom

LONDON, July 29 (Reuters) - Total bond trading revenues at five of Europe’s top banks fell in the second quarter, lagging U.S. counterparts who capitalised on a spike in volatility from the Brexit vote and highlighting a growing gap between the biggest Wall Street and European banks.

Despite increased revenue at Barclays and BNP Paribas from fixed income, commodities and currencies (FICC), a category which includes bond trading, the outcome for the European sector as a whole remained weak.

Taken together with FICC figures from Deutsche Bank , UBS and Credit Suisse, revenues fell by 6.2 percent in the quarter from a year earlier, according to Reuters calculations based on their latest results.

That compares with a 21 percent rise to $13.1 billion in revenue from FICC trading at the five biggest U.S. banks, which benefited from Britain’s surprise vote to leave the European Union.

The volatility across global markets in the last week of June led to record currency volumes for some big banks. But once again, Europe struggled where U.S. banks thrived.

“European banks are under more pressure than U.S. banks to shrink their capacities. Time isn’t on their side, with comparably less retail profits to balance out performance,” said Peter Hahn, professor of banking at the London Institute of Banking & Finance.

“We’re likely to see more evidence of U.S. institutions continuing to take market share,” said Hahn, a former bond operative on Wall Street.

UBS scrapped short-term guidance on profitability due to market uncertainty and Deutsche Bank warned it may need deeper cost cuts to turn itself around against a backdrop of challenging markets and record low interest rates.

Bond trading revenue has been grinding lower for about seven years as new regulations on proprietary trading, derivatives and capital have restricted what banks can do in bond markets, making the business less lucrative.

But within that, U.S. banks have stolen a march on their European rivals.

In 2007, the eight biggest European banks’ FICC trading revenues totalled $48 billion, compared with the $38 billion generated by the five biggest U.S. banks, according to data from analytics firm Tricumen Ltd.

By the end of 2015, European banks’ FICC revenue had almost halved to $26 billion, while U.S. banks’ had risen to $43 billion. So in eight years, Europe’s 26 percent advantage had turned into a 40 percent deficit.


The Brexit vote on June 23 pushed shares of some of Europe’s banks to record lows, with European financials down 26 percent so far this year versus a 7 percent decline in U.S. financials.

Deutsche is under more pressure than most, as with its bond trading business sliding by a fifth in the second quarter. Its shares are down more than 60 percent since John Cryan took over as chief executive in July last year.

“Deutsche remains the 4th largest FICC house but the gap is getting bigger relative to U.S. money center banks, as well as smaller to 5th placed Goldman Sachs,” JP Morgan analysts wrote in a note this week.

Brexit is seen as a negative for banks in the longer term on both sides of the Atlantic because the prolonged uncertainty could subdue deal-making and trading activity. Banks may also face the cost of relocating some London-based businesses and staff to other EU cities.

France’s BNP Paribas bucked the trend, reporting an 18 percent rise in FICC revenue to 1.05 billion euros, but asked by an analyst on whether a spike in trading activity related to Brexit helped the strong performance, chief financial officer Lars Machenil said that there was no “material impact”.

British bank Barclays also saw a boost in fixed income trading, with revenue rising 10 percent year-on-year to 881 million pounds.

Some analysts say the positive outcome didn’t change the overall picture.

“We’re going to see more job cuts and banks starting to close down some trading desks altogether from September to the end of the year,” Octavio Marenzi, CEO and founder of consultancy firm Opimas, said.

“There were not the same declines in Q2 as in Q1 but the numbers are not terribly encouraging and so we could see some major headcount reduction in trading arms and exiting of businesses.”

Editing by David Holmes