Sector: Wholesale Banking Review 4Q19/FY19

Capital Markets: Overview

The 15 banks in this report generated $172bn revenue in 2019, in-line with the previous year. The costs were firmly under control, resulting in pre-tax profit 3% down y/y, mostly on account of US banks’ modest decline in profits. Before the arrival of Coronavirus in late Feb-20, sales and trading was thriving, more than offsetting the relative weakness in primary businesses.

Banks are been reviewing cost-efficiencies of Support staff they accumulated in recent years. It seems that ‘quiet’ time is over: several banks in this report are reducing Support staff.

As per recent buy-side surveys, the most prominent common themes for 2020E are: (1) increased volatility – mostly in equities but also bonds and FX partly due to geopolitical factors (e.g. Brexit and the US elections) and now, Coronavirus; this will highlight the importance of active strategies, but may also impact IPOs; (2) private equity and debt and other alternatives will continue to grow faster than other assets. Ultra-low rates and record public debt remains the biggest macro risk.

We recently initiated coverage of big algo traders and liquidity providers, including Citadel Securities, Jump Trading, Tower Research, Virtu, XTX and others. Efficiency comparison with banks’ trading desks may be unfair (to banks), but is also … quite fascinating.

Commercial Banking & Treasury Services

In the run up to Brexit, the rate of growth in commercial lending volumes in the UK dropped, largely as a result of a slowdown in LME volumes; rates dropped sharply, especially in fixed-rates. In the EU, rates unexpectedly jumped in 4Q19; while in the US, both volumes and rates held steady.

In trade finance, the troubling trends seen earlier in 2019 accelerated: relative to 2018, cash management grew at a healthy clip, but trade finance registered a double-digit drop.

The dominant topic of 2020 will be banks’ international expansion, driven by standardisation: Europe’s Single Euro Payments Area (Sepa), Target Instant Payment Settlement (Tips), Singapore’s FAST and SWIFT’s gpi Instant (successfully trialled in July-19 with 17 banks in seven countries), and others. In trade finance, recent times have seen an explosion of single-platform initiatives: Trade Finance Distribution Initiative, we.trade, Contour (launched in Jan-20; ex-Voltron), Komgo, and Marco Polo, to name a few. This is an unwieldy market, ready for consolidation.

On the whole, these initiatives ease international banks’ drive into regions where they feel they don’t have sufficient presence: in recent times, several banks in this note announced important initiatives for expansion outside their home markets (and that’s in addition to money management giants, e.g. Allianz and AIG, venturing into trade finance). We expect acceleration of this trend in the current year. We also expect that European banks (hobbled by excessive regulation and, even more, by ultra-low/negative interest rates) will be hit particularly hard by US banks (chiefly, J.P.Morgan) offering their services to Europe’s LMEs.

Wealth Management

Most banks in this report announced major hiring programmes in recent months, especially in APAC.

The battle for the small-bracket wealth management clients (investable AuM c.$1-10m; ‘Lower NWIs’/LNWIs in our classification) really heated up over the past year or so. For example, Credit Suisse recently set up a new Private Banking International (PBI) unit, specifically for sub-$20m clients; HSBC added various experimental offerings to its Jade platform; and UBS is moving its $2-5m clients into the category that does not automatically get an advisor (though they retain the right to access the advisors).

Fees will remain under pressure for the foreseeable future. In the UK, Vanguard – which has been increasing its UK-domiciled offering and lowering fees across the board – received the licence from FCA to provide retail investment advice and has created a team focused on partnering with advisers to increase clients’ net returns. Also, in Jan-20, the firm extended commission-free online trading for stocks and options to all Vanguard Brokerage clients. And in the US, Fidelity Investments in Feb-20 joined the (still very few) brokers which offer fractional trading in stocks and ETFs to its brokerage, HSAs, IRAs, and self- directed brokerage accounts via a workplace retirement plans.

The biggest event, of course, was Morgan Stanley’s 13bn E-Trade acquisition. It fills MS’s gaps in coverage, but comes with a hefty price tag. We will comment on implications in a separate report.