European banks: a tale of two models The masters of the universe are humbled. Politicians, regulators and the public have come to disdain investment bankers. And now equity investors have turned cold, too. In 2013, shares in Europe's big universal banks (Barclays, Deutsche Bank, BNP Paribas, UBS and Credit Suisse) rose an average of 8 per cent. That is not too shabby, but put it against the returns elsewhere and it looks thin. The UK's Lloyds rose 56 per cent. Italy's Intesa Sanpaolo rose 27 per cent. Bank of Ireland more than doubled. Focused recovery plays were all the rage. To turn that round will require good luck and good management. Good luck because the anticipated economic recovery has yet to be reflected in investment banking fees. Deutsche Bank analysts estimate that European investment banking fees fell 6 per cent in 2013, with fixed income, currencies and commodities desks shouldering most of the decline. Next year should be a little better (a low single-digit rise in revenues is forecast) if equities and advisory revenues tick up. But good management has a bigger part to play. First, this means finally getting a grip on the sort of behaviour that has led to fines for Libor and Euribor manipulation and a probe into FX trading. It also means making bigger, bolder decisions about business mix. The new regulatory enthusiasm for the leverage ratio (which bases capital requirements on total assets rather than risk weighted assets) changes the game. Analysts at Barclays have found more than 20 divisions at European banks that look capital-constrained on the basis of leverage ratios. About half are investment banking and markets divisions. Finally, banks need to keep pushing down costs. This is one of the few areas in which management can push up return on equity. If they can get all this right, and prove it via a return on equity that is higher than the cost of equity, then there is hope for a re-rating in 2014. But with RoEs for most of the big European investment banks running below 10 per cent, there is little evidence of it happening just yet.