CIB Review 3Q23/9m23

Capital Markets

The banks’ 9m23 operating revenue totalled $154bn; the 4% y/y decline was largely due to EMEA banks’ underperformance. In Banking, weak M&A/Advisory offset strong underwriting fees; and in Markets, Credit and Prime Services revenue grew, while Macro, Commodities and Equity Derivatives declined.

AMER banks matched their costs to revenues; EMEA banks, however, did not, and that led to a sharp drop in their pre-tax profit.

In October, the UK removed the bonus cap, originally introduced by the EU in 2014. Explaining their decision, the UK regulators rightly emphasised that a high(er) proportion of fixed costs reduces banks’ flexibility in difficult times, not least because bonuses are often subject to deferrals and/or clawbacks, while salaries are not. The European Parliament, for its part, voted in favour of Listing Act, a package of reforms aimed at easing the listing requirements and reversing the rule which ‘unbundled’ research costs from trading costs.

The Basel 3 ‘end game’ proposal continues to draw sharp criticism from leaders of large US banks (and at least two Fed governors). Indeed, it is not clear that new rules, if fully implemented in the proposed form, would significantly improve banks’ soundness; but they would, more likely than not, impact the bank’s appetite for lending – and increase the cost to banks’ clients.

Commercial Banking & Treasury Services

Despite weaker demand for loans – most significantly in the US and Eurozone – CTB benefited from high interest rates, banks’ repricing and an increase in fee revenue.

However, the outlook is negative: the boost from high interest rates is wearing off and net interest margins are likely to weaken, depressed by the combination of a lower demand for loans, a rise in the cost of reserves, and rates on corporate deposits remaining unchanged. Several banks are reviewing their business portfolios – and not only in commercial real estate.

In Eurozone, the private lending market slower down dramatically vs 2022 as a result of higher interest rates and expectations of a surge in corporate defaults. There has also been a sharp slowdown in the wider corporate lending sector in Eurozone: clearly concerned about the economic outlook, regional banks tightened the loan criteria even as the demand fell.

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