Sector: Wholesale Banking Results Review 1Q17

Capital Markets: Overview

Capital markets revenues for 13 banks in this report totalled $49bn in 1Q17, 20% ahead of 1Q16. The market was characterised by strong primary and FICC markets, which benefitted US banks far more than their European counterparts.

Per-head productivity increased in most product areas, and banks’ continued vigilance on costs led to a 42% y/y surge in overall pre-tax profits, with FICC profits almost doubling. On a related note, and in contrast to their US peers, several European investment banks in this note effected sizeable cuts to their FY16 bonus pools – Deutsche Bank being the most extreme, with an 80% y/y drop – and/or introduced changes in the way bonuses are calculated and paid out.

In yet another (and for banks very welcome) setback to the Volcker Rule, The Fed recently formalised its decision to allow banks additional five years to sell ‘legacy covered funds’, provided investments were made before the end of 2013. Goldman Sachs – with c.$6bn worth of investments – is the largest beneficiary; but Citi, PNC and others will also benefit. Deutsche Bank, by contrast, was fined $20m for the violation of the Rule.

Commercial/Transaction Banking

In the US, commercial lending volumes in the US slowed in January, then dipped in February on political uncertainty generated by the Trump administration and waning US sales figures. Over the same period, average lending rates increased by c.13bp. In Europe, demand continued to increase across all loan types. Inventories and working capital and the general level of interest rates were important positive contributors to demand for commercial loans.

In transaction banking, payments volumes jumped 10% versus 1Q16; however, trade finance activity was slightly below 1Q16 levels.

The UN is reviewing a perceived trade finance gap. This impacts the SME and mid-cap market, where it is felt that the ‘chronic” shortfall has come about largely on the back of the unintended effects of global financial crime regulation. At the same time, some banks are investing in regulatory technology to cover areas such as cutting the number of ‘false positives’ in their monitoring of suspicious transactions.

Wealth Management

Lending activity continued to increase in 1Q17 on the back of favourable interest rates. Investment management and brokerage revenues also grew, as clients sought to adjust portfolios in the light of higher market volatility.

The industry is in the (selective) expansion mode. HSBC is making a heavy push in Mainland China’s retail and wealth management. J.P.Morgan Securities (led by Chris Harvey from Mar-17) hired a top team from Morgan Stanley for its NYC operation; UBS’ US Wealth Management announced senior hires to boost its capital market capabilities and in Europe, the bank continues its successful rollout of in-house platform SmartWealth. Finally, Barclays announced plans to hire 100 staff for its private banking units across Europe, Dubai and India.

Sector: Wholesale Banking Results Review 1Q17