European banks set to underperform U.S. peers in second quarter, Citi says

Major U.S. banks, including JPMorgan and Goldman Sachs, reported robust Q2 earnings, with investment banking revenues up 16% year-over-year and fixed income trading up 15%. However, Citi analysts forecast European peers will likely underperform, projecting their combined investment banking revenues at $15 billion (+10% YoY but -12% QoQ), attributing the disparity to regional mix, FX, and market share shifts, with most European banks expected to see declines. Citi also downgraded Barclays to "neutral" following its significant share price appreciation.

Analysis

Major U.S. banks, including JPMorgan and Goldman Sachs, demonstrated robust second-quarter performance, with investment banking revenues growing 16% year-over-year to $42 billion and trading revenues showing similar strength. However, these figures mask a sequential slowdown, with investment banking and fixed income revenues falling 6% and 10% respectively from the prior quarter, and executives have flagged uncertainty from U.S. tariffs as a risk to the economic outlook. In contrast, Citi analysts forecast a weaker performance from European peers, citing adverse regional mix, negative foreign exchange translation, and market share losses. European investment banking revenues are projected to rise only 10% year-over-year while declining 12% quarter-over-quarter. The divergence is expected within the European banking sector itself, with French banks BNP Paribas and Societe Generale anticipated to report year-over-year growth, while Barclays, Deutsche Bank, and UBS are projected to see declines. Concurrently, Citi has downgraded Barclays to 'neutral' from 'buy', citing the stock's significant run-up of over 125% since the end of 2023.

Key Decisions for Investors

• Consider a portfolio tilt favoring large-cap U.S. banks over their European counterparts to capitalize on superior revenue growth and market share dynamics.
• Within European financials, a selective approach is warranted, potentially favoring French banks like BNP Paribas and Societe Generale over Barclays, Deutsche Bank, and UBS, which face headwinds.
• Investors in Barclays should re-evaluate their position following the stock's 125% appreciation and subsequent downgrade, as the valuation may now fully reflect its near-term prospects.
• Monitor quarter-over-quarter revenue trends and executive commentary on U.S. tariffs, as these are key indicators of potential moderation in growth and rising macroeconomic risk for the banking sector.