Sector: Capital Markets: Results Review 1Q16

The combined 1Q16 operating revenue of banks in this report dropped 25% y/y, from US$54bn to US$41bn. Front office productivity also declined across the board, despite continuing/extended headcount cuts: 1,600 across BAML, BNPP, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs and Societe Generale, primarily in FICC, but also in equity derivatives (Credit Suisse) and DCM (Deutsche Bank). By contrast, equity and electronic trading teams are hiring at BNPP, Citi, Deutsche Bank, J.P.Morgan and Societe Generale.

The pre-tax profit slumped 30% versus 1Q15. In equities and advisory/underwriting, banks cut costs in-step with a drop in revenue; FICC aggregate profit, however, fell by 42% y/y.

The EU’s cap on bonuses has hobbled banks’ ability to match costs with the shifts in revenue streams. Banks have reduced deferred comp in recent years, but the fixed component of cost at European arms of banks in this report jumped from c.60% in FY12 to 72% in FY15. Coupled with weak markets, this all but guarantees the continued weakness in profitability – or, indeed, a loss. Now, US regulators appear set to effect similar measures, extending the proposals from 2011.

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