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* European banks have cut debt trading in wake of crisis
* Buoyant equities, debt issuance help boost fees in Europe
* U.S. banks still dominate league tables
* But Europeans gain market share
* Deutsche Bank says full-service model is working
By Steve Slater
LONDON, Aug 1 (Reuters) - Europe's investment banks aregiving Wall Street a run for its money despite shrinking theirtrading arms more aggressively than U.S. rivals.
Buoyant equity markets and a surge in corporate debt issueshave caused a bigger-than-expected jump in investment bank feesin Europe helping Deutsche Bank, UBS,Credit Suisse, Barclays, BNP Paribas and Societe Generale outperform their U.S.peers in the second quarter.
The six European lenders saw revenues from trading andselling debt grow 5 percent on average compared to a 9 percentcombined drop at Goldman Sachs, JP Morgan, MorganStanley, Bank of America and Citigroup.
Part of the outperformance was because in the previous yearEuropean banks were hit harder by the U.S. Federal Reserve'swarning that it would gradually reduce its purchase of bonds.
But a surge in debt issuance by European companies thisJune, when European Central Bank President Mario Draghi cutinterest rates to record lows, has also helped.
Grim warnings from the banks themselves had investorsexpecting falls in fixed-incomes revenue of up to a quarter inthe April-June period but the reality proved less bleak after anupturn in activity at the tail end of the quarter.
"Expectations were it (Q2 performance) was going to bereally, really bad, and in the end it just turned out to bequite bad," said David Moss, head of European equities at F&CInvestments.
Faced with new regulations in the wake of the financialcrisis that made debt trading more expensive, Europeaninvestment banks have for the most part renounced theirambitions to be global players and cut their fixed-incomedivisions more aggressively than U.S. counterparts.
The retrenchment has in part been fuelled by public angerover their role in the financial crisis, prompting Europeanpoliticians to impose tougher pay restrictions on traders andencouraging banks in the region to focus more on wealthmanagement or retail and commercial banking.
The scale-back in investment banking means U.S. banks areexpected to continue to dominate rankings, particularly if arise in interest rates prompts a rebound in fixed income, withincreased volatility and rising yield providing tradingopportunities.
JP Morgan topped investment bank revenues in the first halfof this year, with a 7.3 percent market share, according toThomson Reuters data. It was followed by Bank of America andGoldman.
But all three lost market share, partly to European banks.
Deutsche Bank and Barclays were the top European firms infifth and seventh, respectively, but both gained share despiteBarclays being halfway through a radical scaling back of itsinvestment banking division.
Barclays posted a 17 percent slide in revenues from debtsales and trading but, stripping out the impact of a strongpound, the decline was 8 percent in dollar terms.
Deutsche Bank, which is positioning itself as the onlyEuropean full-service investment bank, said its strategy wasworking.
The bank, which is using part of the proceeds of an 8.5billion euro capital increase to reinvest in its fixed-incometrading arm, said it had achieved its best ever share incorporate finance and grabbed "significant" share in M&Arevenues in the United States.
OUTLOOK STILL TOUGH
The European banks were helped by a jump of nearly 30percent in investment bank fees in Europe in the first half ofthe year, outpacing a 6 percent rise in the Americas and a 12percent global increase, according to Thomson Reuters data.
The fees were driven by buoyant equity markets encouragingEuropean companies to raise cash and seal takeovers. Revenuesfrom advisory and issuing equity and bonds for companies forEurope's top banks jumped 21 percent on average, outpacing a 14percent rise at U.S. banks.
European and U.S. banks' equities revenues both fell about15 percent from a year ago, according to Reuters data. Inconstant U.S. dollar terms, the European banks' out-performancewas greater.
The brightest spots included near one-third jumps inadvisory revenues at Barclays, UBS and SocGen and increases infixed-income revenues at BNP Paribas and Credit Suisse.
Despite the second-quarter gains, the outlook remains tough,and investigations into alleged wrongdoing in foreign exchangemarkets and privately run stock markets could be costly.
Litigation concerns are depressing valuations, and DeutscheBank and Barclays shares trade at only 0.6 times their bookvalue - or the value of their assets - compared to an average of1 times across European banks and the big U.S. banks.
Several banks also signalled the strong June did notcontinue in July, with Barclays cautioning that it was likely tobe the slowest month of the year.
"The overwhelming issue for many investors is the fines,because they're unquantifiable," said F&C's Moss. (Additional reporting by Simon Jessop; editing by CarmelCrimmins and Tom Pfeiffer)
