Extending extraordinary gains from 1H20, the combined capital markets revenue of 15 banks in this note reached $51bn in 3Q20, lifting the 9m20 total to $172bn, 30% ahead of 9m19 – and easily beating conservative expectations outlined by some banks at the end of 2Q20. Revenue/FTE surged 55% y/y. FICC remains the star performer: up 50% and 29% y/y for 9m20 and 3Q20, accounting for half of 9m20 capital markets revenue and 57% of profit.
The US banks grew their 9m20 revenue by 35% y/y – vs EMEA banks’ 19% – but also continued investing in staff and tech, while EMEA banks kept their costs flat. As a result, EMEA banks doubled their profit vs 9m19, well ahead of the US banks’ comparably modest 69% gain.
We do not expect lavish year-end bonuses: the single most important driver of a surge in earnings was central banks’ actions, rather than traders’ outperformance; banks that can’t pay dividends are unlikely to pay big bonuses; and universal banks are wearily eyeing their loan portfolios.
In a recent presentation to SIFMA, Morgan Stanley’s CEO made an important point: despite the surge in trading volumes and 90%+ of staff working remotely during the crisis, there were no significant outages or breakdowns – a testament to the effectiveness of banks’ tech investment. This matters, as Gorman does not expect more than 25% of MS’ staff to return to the office by the end of 2020 – and neither do his peers.
Commercial Banking & Treasury Services
Corporate Banking revenue was hit by lower spreads and, in some cases, significant repayments as high-grade corporate clients switched to capital markets for their funding needs. In Treasury Services, margin compression more than offset the growth in balances.
Deposits margin compression is still in evidence, but is offset by higher balances, fees and lending revenues. Universal banking leaders also extracted more revenue from cooperation with their investment banking arms. The outlook for lending volumes is highly dependent on clients’ confidence, and that is by no means a given: as governments start to wind down support programmes, market participants expect non-performing loans to mount. In the meantime, there has been a surge in demand for (high-margin) loans from direct lenders – often divisions of private equity firms.
Several major banks exited (sections of) commodity trade finance markets in recent months. Other banks are not rushing to fill this gap, but this is probably a temporary pause: less competition will drive margins higher, attracting, in turn, fresh banking entrants.
In 3Q20, deposit and loan balances grew, as did client flows and management fees, supported by significant capital markets activity – wealth managers with strong links with their investment banking arms pulled ahead of their peers. Deposit margin compression remains a significant headwind for net interest income, however. Credit loss allowances rose; not to crisis levels, but in our view, this remains a potential concern.
Banks demonstrated strong cost control, especially in performance-related pay and discretionary spend. The resultant pre-tax profit for 9m20 was 6% ahead of the prior-year period.