CIB Review 4Q22/FY22

Capital Markets: Overview

Operating revenue of banks in this note reached $206bn, 12% below FY21. Banking revenue halved on weak ECM and DCM, but Markets advanced 9% y/y, driven by strong macro and, to a lesser extent, commodities and equity derivatives.

In view of the uncertain outlook, banks cut overall costs by 4% vs FY21; not surprisingly, Banking bore the brunt of cost reductions. Low expectations for bonuses were, generally, met. Donuts were not as common as feared, but in underperforming areas – Banking and, within it, ECM and leveraged finance in particular – bonuses halved vs 2021. Macro, however, did a lot better, with several banks in this note sharply increasing the payouts. Across the board, and more than was the case in previous years, banks directed bonuses towards strong performers – in both the front office and technology – and senior ranks.

Meanwhile, a recent study of 45 SIFIs by Halle Institute for Economic Research (IWH) showed that the EU’s politically-driven cap on senior bankers’ bonuses was not only ineffective – in many cases, it actually increased the appetite for risk-taking.

Commercial Banking & Treasury Services

ECB’s recent data showed that Eurozone’s largest banks managed to reduce the amount of bad debts on their books in 3Q/4Q22. However, the ECB is – in our view, justifiably – concerned that banks are underestimating the risk arising from an economic downturn and are not setting aside enough provisions. ECB data also showed that corporate lending in the Eurozone grew by 6.3% y/y in December. This is well below the 8.3% only a month earlier, and suggests that ECB’s sharp increases in base rates having the intended effect. Further rate raises by ECB are expected – the current consensus is for 3% in 1Q23 and 3.5% in 2Q23 – which suggests that the volume of corporate loans may stagnate (or worse) in the current year.

Project finance volumes loans reached record volumes in 2022 driven by Americas and, to a much lesser extent, Asia; EMEA declined 10% y/y. Transaction banking – and cash management in particular – recorded strong growth. Higher rates and spreads and, in many cases, repricing of deposits, drove the revenue; this was partially offset by higher deposit fees and lower investment banking fees.

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