The combined revenue of banks in this report reached $59bn in 1Q23, 8% below the prior-year period. There has been no recovery in Banking markets but several banks expressed optimism that volumes will perk up in late 2023: first in M&A/Advisory – which should benefit from institutional ‘dry powder’ – then, sometime in 2024, in IPOs and LBOs. In the meantime, several big players are trimming teams. Aggregate FICC revenue advanced slightly, driven by ‘good volatility’ in Rates and Credit; FX and Equities dropped, however. Partly due to timing of comp accruals, costs declined by a comparably modest 5% y/y, leading to 12% y/y decline in pre-tax profits.
Despite regulators’ assurances that the sector is financially sound and FDIC’s swift reaction to SVB’s crisis, US regional banks remain under pressure: SPDR S&P Regional Banking ETF hit lows last seen in Mar-20, down 40% since the start of 2023. Without an even stronger intervention from regulators, further failures are likely: after more than a decade of ‘easy money’ – which, predictably, created bubbles – central banks then lurched in the opposite direction, shocking economies. Perception matters: central banks should have started years ago, with gradual increases. In any case, new entrants see opportunities: e.g. Blackstone is offering Regionals to reduce the lending risk by channelling their loans to its insurance clients.
Commercial Banking & Treasury Services
Commercial and transaction banking revenue totalled $39bn, 22% ahead of 1Q22. Revenues were primarily driven by strong Treasury Services, which surged on higher margins in the high-interest environment; several banks in this note reported record 1Q revenue.
Costs also grew, but at much slower rate; the resulting pre-tax profit was 38% up y/y.
In the US, in expectation of further rise in rates, corporates are increasingly turning to derivatives market to lock rates on future borrowing.
Project finance volumes jumped 20% y/y as strong US growth (especially in oil and gas) more than offset a sharp drop in Europe and APAC.
ECB reported a surge in European banks’ usage of Significant Risk Transfers: $190bn in 2022, confirmed by several large banks and specialists which facilitate such transactions. The growth in SRT volumes continued in 1Q23 and, with banks having few other options to boost and/or free up their capital, it is reasonable to expect continuation of this trend during the rest of the year.