PARIS: Europe's mid-tier banks, having already shrunk their investment banking activities, may face increasing pressure to scale back in areas like proprietary trading and M&A advisory as costly regulation and weak demand eat into earnings.
From Credit Agricole in Paris to Commerzbank in Frankfurt, many European banks have fallen further behind Wall Street institutions such as Goldman Sachs and JP Morgan in industry rankings as they cut most types of lending and scale back risky trading bets.
As the chasm widens, uncomfortable questions are being asked about the presence of some second-division players.
"We don't have the room for four investment banks in France," said one senior Paris-based banker, who declined to be named because of the sensitivity of the topic.
The problem is particularly acute at Credit Agricole, France's third-largest bank by stock market value.
While France's largest lender BNP Paribas is expanding in Asia after shrinking its balance sheet and boosting capital ratios, Credit Agricole, along with domestic rivals Societe Generale and Natixis, has been retrenching.
Agricole has cut back on equities, derivatives and M&A advisory to focus on a future as a pared-back investment bank catering to clients in France and elsewhere in Europe.
"We've streamlined the investment bank and it seems to us that the plane can fly in these kind of conditions," Chief Executive Jean-Paul Chifflet said recently.
But with a return on tangible equity of 1.6 percent, according to a recent Mediobanca report, even after substantial job cuts and asset sales, there are questions about whether Agricole's investment bank is adding or subtracting value.
The lender, which has a medium-term target for return on equity (ROE) of 10 to 12 percent for its investment bank, declined comment.
Mediobanca analyst Antonio Guglielmi said Agricole should consider selling its investment banking business and refocus on its much higher return asset management unit, Amundi as well as French retail banking.
But there is a lack of buyers generally for mid-table investment banks, as larger players seek to conserve capital and avoid taking on loss-making assets.
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