Capital Markets: Summary
The banks in this report generated $138bn revenue in 9m19, slightly below 9m18 as Banking, FICC and Equities all declined; only dedicated prop & PI posted modest growth. However, most banks also kept costs under control; the aggregate 9m19/9m18 pre-tax profit declined by a relatively modest 6%. The US banks’ held up well, with only a 3% y/y fall in profit; in contrast, Europeans’ Banking and Equities profits dropped sharply, more than offsetting higher FICC profits.
The hiring in middle-market space continues apace, in CIB and money management divisions: BAML, Goldman Sachs, J.P.Morgan and Morgan Stanley all announced significant new initiatives in recent months. Tricumen has a dedicated coverage of this market segment.
There is a great need, but few signs that the end of ‘Japanification of Europe’ (and, to a lesser degree, the US) is anywhere in sight. Inflation remains well below what most economists would call healthy, while the utility of ever-lower rates in stimulating the major economies – which remain mired in next-to-no-growth – has been in question for years. Ongoing trade wars and customers (retail and corporate) in major democracies addicted to interest rates at or near zero almost guarantee the continuation of QEs and variants, even though it is entirely unclear what tools will central banks deploy to counter the next – probably overdue – economic slowdown.
Commercial Banking & Treasury Services
In 3Q19, commercial lending volumes fell slightly in the US and flatlined in large EU economies. Adding to this, there was no let-up in margin pressures, however, and several large banks have (again) reported higher hedging costs.
In response, banks are utilising (new) technology, focusing on profitable clients, and fostering collaboration between commercial banking and other parts of organisation, chiefly investment banking. In Europe – most significantly, in Germany – banks are also increasingly shifting the burden of low/negative interest rates to their large clients.
The combined operating costs of 10 banks in this note declined 4% from 9m18, led by Europeans.
Trade finance volumes accelerated the y/y decline seen in 1H19. Banks’ 9m19 revenue fell 2% y/y, but the hit to profits was cushioned by better cost control, especially at European banks.
The aggregate revenue of wealth managers in this note totalled $78bn in 9m19, unchanged from the prior-year period (3Q19/3Q18 revenue grew 2%). However, the strong cost control – reflected, for most part, in pay-per-head – resulted in pre-tax profit growth of 5%, led by European peers.
In early Oct-19, Charles Schwab Corporation abolished retail commission fees for US stocks, ETFs and options trades; TD Ameritrade, ETrade and Fidelity swiftly followed. Commenting on the move, Schwab’s founder predicted that this move will lead to the consolidation in retail brokerage – lo and behold, within weeks, news emerged that the firm is in talks to take over TD Ameritrade, one of its key rivals.
This development will probably not have a huge immediate impact on banks in this report because they are global, already provide some commission-free services (especially in the US – see BAML page) and because it’s the advisory (though those are under pressure, too, especially in APAC) and (increasingly) lending fees that really matter. Regardless, longer term … the writing was on the wall ever since robo-advisors arrived on the scene. The industry is headed to zero commission in various forms and fashions and banks – including the globals in this note – will need to find a replacement for a significant revenue stream.