CIB Review 4Q20/FY20

Capital Markets: Overview

The exceptional year ended on a high note: banks featured here reported capital markets revenue of $49bn in 4Q20, 24% ahead of 4Q19. On FY basis, revenue jumped 30% – primarily driven by US banks’ Markets divisions, and FICC in particular – and per-FTE productivity by 26%.  Aggregate costs also grew in 2020, but at a comparatively modest 7% y/y; US banks’ continued investment and high bonuses pushed their costs up by 11%, while EMEA banks’ costs were flat y/y. Pre-tax profit almost doubled to $91bn, with EMEA-headquartered banks’ profits surging 140%.

Most banks confirmed a strong start to 2021, especially in M&A, ECM and Equities (subject to a successful rollout of Covid vaccinations) and, to a lesser extent, FICC.

The post-Brexit transition to EU trading venues went smoothly – a testament to banks’ readiness. Without an agreement on equivalence, the shift in liquidity from London to the EU was immediate. In Equities, Paris and Frankfurt made gains, but it was Amsterdam that emerged as an early winner: traded volumes almost quadrupled in Jan-21, making it Europe’s #1 trading venue.  Also, the trading of Euro-denominated swaps in London dropped from 40% in July 2020 to just 10% in January 2021, according to IHS Markit, with volumes moving to NYC and the EU.  Dublin is firming up its already strong presence in e-trading, and Amsterdam expects a surge in Technology IPOs.

Commercial Banking & Treasury Services

New arrival: Wells Fargo. Product definitions updated.

Partly due to Wells Fargo’s weak performance, European banks’ 2020 revenue and profits held up better than was the case at their North America counterparts, in both Commercial Banking and Treasury Services. EMEA banks’ aggregated Commercial Banking pre-tax profit was unchanged from 2019, while AMERs’ profit dropped 18% y/y.  Also, in Treasury Services, EMEA banks’ profit declined 13% y/y, easily outperforming AMER peers.

Demand for corporate loans remains soft due to an uncertain economic outlook and strong activity in capital markets. At big US banks, criticized commercial loans more than doubled in 2020, on average, with sectors hit hardest by the lockdowns – consumer, retail, automotive, energy, real estate – registered the sharpest increase.

Most market commentators expect a recovery in 2021, especially in trade finance. However, that is contingent on a successful rollout of vaccines and gradual relaxations of restrictions and the impact (especially on lending to SMEs) from Basel 4.  Until firm trends are established, we expect banks (those headquartered in EMEA in particular) will proceed with caution and focus on margins, rather than volumes.

CIB Review 4Q20/FY20