Worst January of the decade for the investment bankers in Europe…

Investment bankers in Europe are off to the leanest start to a year in a decade as dwindling income from deal-making and trading presses firms to reduce costs.

Revenue from arranging mergers, loans and stock and bond offerings for clients in Europe, the Middle East and Africa fell 22 percent to $1.58 billion last month from the year-earlier period, according to data compiled by New York-based research firm Freeman & Co. That was the worst January since 2004, the data show. Comparable fees in the U.S. fell 19 percent in the period to $2.5 billion, the same level as 2011.

Banks in Europe are grappling with a stagnant economy, a rout in emerging markets that has crimped bond sales and regulatory pressure to shrink their operations. Fees in the region have been stagnant since the financial crisis and are at about half their 2007 peak, Freeman’s calculations show. That may force banks to cut jobs for a third consecutive year and reduce compensation for their employees.

“It doesn’t bode well,” said Paul Vrouwes, who helps oversee about 6 billion euros ($8.1 billion) of financial stocks at ING Investment Management in The Hague, Netherlands. “It’s unlikely to be a strong quarter, where investment banks need it, and they already are under pressure to shrink.”

About $2.9 trillion has been wiped from the value of equities worldwide this year, according to data compiled by Bloomberg. Euro-area economies, forecast by the International Monetary Fund to return to growth in 2014, still lag behind the U.S., which may expand 2.8 percent, favoring firms based there.

January Contraction

The January contraction contrasts with banker expectations late last year that an economic revival in Europe, especially in the U.K., would lead to improvement in investment banking in 2014. The Stoxx Europe 600 Index gained 17 percent last year prompting companies to plan initial public offerings. Ireland returned to thebond market, signaling that the worst of the European debt crisis was over.

Expenses account for a bigger share of revenue at some European banks than at their U.S. counterparts. Deutsche Bank AG’s cost-to-income ratio was 79 percent last year, higher than in 2012 and more than U.S.-based banks Citigroup Inc. (C), JPMorgan Chase & Co., Goldman Sachs Group Inc. (GS)and Bank of America Corp., data compiled by Bloomberg show.

Barclays, RBS

Barclays Plc (BARC) and Royal Bank of Scotland Group Plc, two British banks that report full-year results this month, are preparing to eliminate hundreds of investment-banking jobs, according to two people with knowledge of the matter who asked not to be identified because the cuts haven’t been announced. Others firms in Europe may follow.

“There is 20 percent overcapacity in the market,” said Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London, referring to staffing levels in Europe. “You don’t solve the compensation problem by firing vice presidents. You need to do managing directors and partners.”

RBS (RBS), Britain’s biggest publicly owned bank, is headed for its largest pretax loss since 2008 after the Edinburgh-based lender set aside an additional 3.1 billion pounds ($5.1 billion) for legal and compensation claims on Jan 27. Barclays, the second-biggest U.K. bank by assets, started cutting senior bankers and traders in fixed income, currencies and commodities last week, according to people with knowledge of the matter. Barclays is slated to report results on Feb. 11 and RBS Feb. 27.

‘Fragile’ Recovery

None of the five largest Wall Street firms has announced any job cuts in their investment-banking and trading units in the last six months, data compiled by Bloomberg show.

U.S. banks are benefiting from stronger domestic economic growth, which typically leads to more mergers and IPOs.

Goldman Sachs’s investment-banking backlog, an estimate of the firm’s future net revenue from deals it deems probable, was up “significantly” at the end of 2013 from a year earlier, the New York-based company said in its earnings release on Jan 16. Morgan Stanley (MS) Chief Financial Officer Ruth Porat said last month the bank was seeing a “pickup in mergers and acquisitions momentum coming from chief executive officers’ confidence that we’ve all been looking for quite some time now.”

Deal-making in the euro area will remain “lackluster” in part because of the “fragile economic recovery,” Fitch Ratings said in a report this week.

The value of mergers in Europe announced in January fell 11 percent to $55 billion from a year earlier, the lowest since 2010, according to data compiled by Bloomberg. Mergers in the U.S. jumped more than 35 percent to $95 billion, the data show.

Shrinking FICC

Fees from arranging syndicated loans fell 83 percent in Europe, the Middle East and Africa to $47 million in January, while sales of bonds dropped 14 percent to about $802 million, according to Freeman. Freeman’s fee estimates are based on completed transactions compiled by Thomson Reuters. They exclude income from trading, capital gains or losses on securities, interest payments or derivatives.

Diminished fees aren’t the only challenge for Europe’s biggest lenders. Fixed income — traditionally the largest revenue generator for Deutsche Bank (DBK) and Barclays’s investment banks — has been shrinking since last year as central banks withdraw liquidity from the market causing investors to shift to equities and away from bonds. Deutsche Bank generated 15 percent of its revenue from trading debt and other products in the fourth quarter of last year compared with 27 percent in 2012.

Outpacing Europe

The U.S. probably will continue to outpace Europe in debt trading for several years because of faster economic growth there, co-Chief Executive Officer Anshu Jain told analysts on a Jan. 20 call as the Frankfurt-based bank, Germany’s largest, reported a fourth-quarter loss.

“Undoubtedly we do have to look at our U.S. versus European size of platform and continue to reinvest,” Jain said, referring to the distribution of the company’s resources.

The number of people at Deutsche Bank’s investment-banking and trading business fell by 210 to 8,435 at the end of 2013 from a year earlier, the company said in a Jan. 20 presentation on its website. Spokesmen for Deutsche Bank, RBS and Barclays all declined to comment on further cost cuts.

“Fixed-income in Europe will be dead for a very long time,” Sanford C. Bernstein’s Barua said. “Banks and governments are the biggest suppliers of fixed income, and their balance sheets aren’t expanding, so where will the investment banks make their money from?”

Emerging Markets

Price swings in emerging markets may damp trading further, leading to lower fixed-income revenue, Kian Abouhossein, a London-based JPMorgan analyst, wrote in a note to clients Feb. 3.Standard Chartered Plc (STAN) and HSBC Holdings Plc, both based in London, and Credit Suisse Group AG (CSGN), Switzerland’s second-biggest lender, are the most exposed to emerging-market fixed-income revenue, according to Abouhossein.

Credit Suisse, which provides a breakdown of its fixed-income revenue, said volatile trading conditions helped send emerging-markets revenue down by about 17 percent to $875 million in the nine months through September from a year earlier, company filings show. Executives at the Zurich-based lender declined to comment.

The KBW Bank Index (BKX), which tracks 24 U.S. companies, fell 2.8 percent in January, compared with a 1.2 percent gain in the Bloomberg Europe 500 Banks and Financial Services Index. Banks in Europe are valued at an average of 1.2 times their tangible equity, compared with 1.8 times for their U.S. peers.

“We expect U.S. investment banks to continue to outperform European Union peers as return expectations for European investment banks remain too high,” James Chappell, an analyst at Berenberg Bank in London, said in a Jan. 31 note. “2014 is likely to be an important year for European bank managements, which must make important decisions about the size of their investment banks and how committed they are to the business.”

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