Capital Markets: Overview
Capital markets’ operating revenue totalled US$132bn in 9m16, 5% below the prior-year period. FICC rates and credit outperformed in 3Q16; primary fees and Equities trading revenue declined vs 3Q15; and FICC prop trading jumped 13% as traders capitalised on market volatility. Banks demonstrated strong cost control: 9m16 operating pre-tax profit fell only 2% y/y. At end-9m16, FICC and Equities front-office headcount was 6% and 5% below 9m15, respectively.
Three recent developments are net positive for banks. Regulators in Europe and Japan are siding with banks and are threatening ‘mutiny’ over ‘Basel 4’; the industry claims that proposed revisions would hit some regions (Europe) more than others (USA), and regional regulators are very supportive. In the USA, the President-elect Trump seems determined to repel portions of Dodd-Frank. Finally, rumours emerged that some US banks are considering a legal challenge to aspects of the Fed’s annual stress tests; even a mention of a legal challenge is extraordinary.
Commercial banking in the USA benefitted from the improvement in net interest margins and an increase in lending activity. This trend was repeated in most major economies across the globe with the mid-cap/SME segment outperforming the large-cap/MNC.
In treasury services, a 6% y/y decline in trade finance activity, caused by weaker trade flows along APAC trade corridors, depressed revenues. This was, however, more than offset by improved payments flows and liquidity management.
APAC continues to produce great challenges, but also long-term opportunities. Banks – Credit Suisse and UBS in particular – continue their heavy investment in the region, but compliance concerns are causing some to shed low-yielding clients. In October, Deutsche Bank’s former Head of APAC wealth management Ravi Raju, the key architect of the bank’s wealth management operation in the region, left to join UBS.
Lending volumes continued to grow, driven by clients’ demand for relatively cheap financing.
Investment management and brokerage 3Q16 revenue declined versus the prior-year period, due to client’s cautious investment behaviour. As volatility returns to the markets, investment revenues may well recover.