Capital Markets: Overview
Investment banks in this report generated revenue of $127bn in 1H21, 6% ahead of 1H20. Operating costs grew 12% y/y: US banks’ continued spend/investment – including performance-related comp accruals – contributed to a 4% dip in pre-tax profits. European banks, by contrast, increased profits, but that was partly due to the non-recurrence of losses in structured equity derivatives in 1H20. In aggregate, pre-tax profits in Banking and Equities jumped 50% and 43% vs 1H20; but slumped 37% in FICC.
The 2H21 revenue could exceed consensus expectations – especially in businesses related to stock markets. Our base scenario is 20% decline in 2H21 vs 1H21.
Commercial Banking & Treasury Services
Banks featured here grew commercial banking revenues and pre-tax profit by 6% y/y in 1H21. Low interest rates remain a drag, but most banks were able to offset the impact by higher fees across products and deposits. In the US (and, to a lesser extent, Europe), middle-market banking was the key driver, especially as CRE and corporate banking stagnated.
A year and a half into the Covid crisis, it is worth noting that private debt played an important role as an alternative to commercial bank lending – and is, thus far, in a very good shape. Sceptics point out that this may change; market participants, though, stress that key risks associated with private loans may also be the source of strength. Private loans are typically illiquid and are, as such, predominantly supported by long-term investors; they also avoid cyclical industries – such as those hit the most in the crisis – and are cushioned by plentiful equity (often exceeding 50%), as a result of huge amounts of capital raised in recent years. It is early days; but, barring a major shock or widespread losses, private debt appears set to grow in importance.
Treasury services revenue dipped, while costs grew 3% y/y: pre-tax profit dropped 15% y/y.