CREDIT Suisse is raising SFr6bn of fresh capital while cutting back the amount that it allocates to securities trading; Deutsche Bank is dividing its investment banking division in two and wants to trim it; Barclays’ intended chief executive, Jes Staley, is likely to curtail its investment bank outside the UK and the US. It does not take a genius to notice a common theme for European investment banks: retreat.

In April, I wrote that Europe needed at least one investment bank to compete head on with US giants such as Goldman Sachs and JPMorgan Chase. Shortly afterwards, Anshu Jai n resigned as co-chief executive of Deutsche Bank and Europe’s banks headed in the opposite direction. UBS, which has raised its profitability since cutting bond trading in 2012, is the new model.

One can see their point. It is very hard to break into Wall Street and even Goldman is having difficulties with bond trading, the dominant revenue producer of the pre-2008 boom. It is even harder for European banks such as Deutsche to make a decent return when such activities have been hit by higher capital and liquidity requirements. Shareholders are no longer willing to tolerate them dallying.

Global investment banking is an expensive business that involves paying a lot of employees very highly to do many different things — from advising companies to underwriting equities and bonds, to trading currencies and precious metals — in many places at once. When enough of these activities are doing well they support the rest; when few are, it is painful.

But as Napoleon discovered on his way back from Moscow in 1812, retreating can be at least as hard and risky as advancing. In theory, it makes sense to ditch the parts of investment banks that do not achieve high returns and retain the parts that do. In practice, it is not as simple as that. If it were, European banks would not have expanded as much in the first place.

The first difficulty with retreating is that you need somewhere better to retreat to. UBS did the obvious three years ago because its fixed income division was not only facing regulatory pressure but was barely profitable in the first place. Meanwhile, it owned one of the world’s best private banks and wealth management divisions. What would you have done?

Credit Suisse has a comparable ease of choice, although less obviously than UBS since its wealth management arm is smaller and it operates the former First Boston on Wall Street. Tidjane Thiam, its new chief executive, has now set it firmly on the UBS path. Similarly, Barclays has a decent investment bank in the US and UK, and a strong UK retail bank, although it faces the problem of the UK capital ringfence.

John Cryan, the new chief executive of Deutsche Bank, has a tougher task. Not only is Deutsche’s domestic retail bank outmatched by German savings bank, but bond trading was its biggest strength. It wants to build up equities and wealth management but that will take time — meanwhile, it cannot retreat at the speed of UBS because it would be left with too little.

The second difficulty is that the various parts of a global investment bank fit together in a way that makes it tricky to drop the lossmaking ones while retaining the profitable ones. Equity trading and brokering, for example, is a commoditised business with low margins but it enables profitable activities such as equity underwriting. There is collateral damage if you cut it.

Every bank yearns to have a big wealth management division; to advise companies on mergers and acquisitions; to underwrite initial public offerings and to operate in profitable markets without having to keep offices open in countries that are in recession. But it took banks such as Morgan Stanley decades of investment — and consistency — to achieve their lead.

Third, doing some things but not others is a tricky brand offering. Most of us know what a global investment bank offers — broad financial services for corporates and institutional investors. We also understand what a banking boutique does — a few services for companies, including advisory work. But what about a medium-sized European bank with global reach?

UBS, for example, is big in equities and trades precious metals and currencies but has cut back sharply in bonds. It has a limited advisory business in the US, focusing on a few industries such as healthcare. The result is nicely profitable — it earned more than twice its target of a 15pc return on equity in the second quarter — but it is not easy to define.

Retreat can work if it is executed well — the simplest way to increase profits in a shrinking market is to cut costs — but it requires a clear destination and strong management. The latter is extremely scarce in investment banking, which has generally been run by stringing financial activities loosely together and giving the largest year-end bonuses to those who earn the most.

European banks need leaders to grapple with operations in detail, cutting some while hurting others as little as possible. Deutsche has brought in Mr Cryan, formerly of UBS; and Barclays plans to exchange Antony Jenkins, a retail banker with little sympathy for Wall Street, for Mr Staley, who worked at JPMorgan.

If they cannot solve the puzzle, no one else is likely to.

john.gapper@ft.com

Published in Dawn, Business & Finance weekly, October 26th , 2015

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