CIB Review 2Q22/6m22

Capital Markets

In 1H22, banks in this report generated operating revenue of $116bn, 7% below 1H21 as a sharp drop in underwriting fees and spread products was only partially offset by strong macro products and equity derivatives. After a tight 1Q22, banks were unable to reduce costs to match a decline in revenue; as a result, pre-tax profit dropped to $45bn, 14% down y/y.

In an ominous sign for banks, US senators are reportedly pushing banks to hand over trading data on their activities in Russian debt in an effort to find out whether they or their clients are profiting from the war. There has been little development so far, but banks confirmed that they are helping clients manage and/or close their trading positions. Extensive regulatory review and litigation – possibly years from now – seems likely.

In the EU, ECB released a major report on its ‘desk-mapping’ initiative, which is meant to ensure that banks operating in the EU have full control over their balance sheets within the EU. The report found that, of 264 desks assessed, 70% still implement a back-to-back booking model with the UK, 20% are organised as split desks; and that 21% warrant ‘targeted supervisory action’. In anticipation of ECB’s announcing binding decisions for material risk desks by the end of 2022, banks are hiring.

Commercial Banking & Treasury Services

Lending revenue grew on strong volumes and higher margins. Net interest income also advanced, on healthy loan and deposit growth.

Strong revenue growth in transaction banking was driven by net interest income and liquidity management. In sharp contrast to widespread scaling down in 2020, commodity trade finance is booming.

Cash management enjoyed steady growth in 2Q22. Liquidity management, global import and export volumes were all up versus 2Q21 and sequentially, and payments volumes are expected to hit a record high. Partly offsetting were the increased competition and margin pressures. Trade Finance benefited from record commodity prices and rising interest rates.

Geopolitical tensions notwithstanding, rising interest rates and high commodity prices suggest a bright outlook for trade finance and commodity financing in particular. In 2021, faced by defaults caused by the pandemic and frauds, key European lenders restricted financing of commodity transactions. Interest is on the rise again, however: commodity traders are receiving more loans. Fraud – duplicate financing, in particular – remains a concern, but yields are tempting.

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