At the center of the 2008 financial crisis were the giant U.S. banks deemed "too big to fail." Now they are bigger and more influential that ever. Their share of global investment banking fees, earned for work related to M&A, IPOs, and other securities underwriting, rose from 53% in 2011 to 62% in 2018, according to Coalition, an industry data provider, as reported by The Wall Street Journal. Additionally, in 2018, U.S. banks earned 70% of M&A fees, 60% of stock commissions, and 60% of fees paid to hold and move corporate cash, the Journal adds.

Nonetheless, bank stocks have been market laggards in 2019. The S&P 500 Financials Sector Index, with top constituents like Bank of America Corp (BAC) and Goldman Sachs Group Inc. (GS), is up by 14.68% year-to-date through the close on Sept. 6, compared to an 18.82% YTD gain for the entire S&P 500 Index (SPX), per S&P Dow Jones Indices. Key analysts have downgraded bank stocks as recession risks remain high despite the prospect of new U.S.-China trade talks.

Significance for Investors

Betsy Graseck, global head of banks and diversified finance research at Morgan Stanley, is among those who have turned negative on banks, downgrading them from "Attractive" to "In Line" during the summer, per a detailed interview with Barron's. Declining interest rates, decelerating job growth, and slowing corporate EPS growth are among the factors driving her pessimism.

Meanwhile, the leading European banks are smaller and less profitable than their big U.S. rivals, and some are retreating from Wall Street, the Journal notes. German-based Deutsche Bank AG (DB) is laying off thousands of investment bankers. Swiss-based UBS Group AG (UBS) has shut down its massive trading floor in Stamford, Connecticut, returning to its historic core business in private banking. Only U.K.-based Barclays PLC (BCS) seems determined to remain a global universal bank.

Global investment banks have cut nearly 30,000 jobs since April, the Financial Times reports. Deutsche Bank leads the way, laying off 18,000, with HSBC PLC (HSBC), Barclays, Societe Generale, and Citigroup Inc. (C) among the other big names shedding staff. Most of the job eliminations are coming in Europe, which may increase U.S. dominance in the sector.

After the 2008 crisis, U.S. banks added capital and reduced risk, while their European rivals delayed, the Journal indicates. In the U.S., business activity rebounded, consumers borrowed and spent, the federal tax cut that took effect in 2018 increased bank earnings, and rising interest rates added to bank profit margins. Europe, by contrast, has been beset by slowing economies and borrowing.

At the same time, U.S. banks were expanding their footprint in Europe. For example, in every year since 2014, JPMorgan Chase & Co. (JPM) has generated more of its investment banking revenue in Europe than in any other region, driven by its 2009 acquisition of U.K.-based investment banking firm Cazenove, per data from Dealogic cited by the Journal.

Additionally, increasing globalization means that many European companies are earning more of their money in the U.S. market, making it more useful to enlist U.S. financial institutions for their commercial banking and investment banking needs, the report notes. Meanwhile, when U.K.-based food delivery startup Deliveroo looked to expand in Europe and the Middle East, it chose Citigroup, which operates in 98 countries and offers a global digital platform, to process all its money flows.

Looking Ahead

While news that the U.S. and China plan to resume trade talks in October spurred a rebound in bank stocks last week, the global economic outlook nonetheless remains uncertain, which puts the prospects for loan growth and lending rates at risk.