Sector: Wholesale Banking Results Review 1Q18

New arrivals: Royal Bank of Canada, Standard Chartered, Wells Fargo

Capital Markets: Overview

The combined revenue of 16 banks in this report totalled $56bn, 7% ahead of the prior-year period. Equities were the key contributor, helping US banks widen their lead over their EMEA peers in overall revenue and profit. Productivity increased in all major product areas.

The main US regulators – The Fed, OCC, FDIC, SEC and CFTC – published a joint proposal for amendments to Volcker Rule. The main aim of the proposal is to clarify the definition and extent of prop trading, and to make compliance easier for smaller banks. Under the proposal, pure prop trading would remain forbidden, but the proposal would allow banks to establish and enforce internal trading limits for underwriting and market-making, and – more significantly – it exempts most foreign banks, even if a trade which originated outside of the US is routed via (or is financed by) a US affiliate. In our view, this is good news, as the original Volcker Rule was too prescriptive and mostly unnecessary: during 2008 Crisis, prop accounted for 4% of banks’ total losses.

Commercial/Transaction Banking

Payments volumes grew 12% y/y, with APAC showing the strongest increase. Trade finance was flat, hampered by static volumes.

Commercial lending in the US was essentially flat: new loans volumes were unchanged from 1Q17 and margins were also steady. In Europe, UK saw strong growth, with lending volumes rising as much as 10%. Germany, by contrast, suffered a decline in activity, with volume 11% below the prior-year period.

Wealth Management

Banks in this note reported revenue of $19bn in 1Q18, 8% ahead of 1Q17, and $6.5bn pre-tax profit, up 16% y/y. This growth was evenly spread between lending, investment management and brokerage.

The competition is intensifying in APAC, which became the world’s largest HNWI market in 2017. Credit Suisse, J.P.Morgan and Standard Chartered all raised their minimum asset requirements in recent times; while BNPP, HSBC and UBS are targeting the sub-$5m segment. Morgan Stanley has created a new 70-strong Family Office Resources team, focused on the bank’s UHNWI clients.

A digital wealth management startup Exo launched in the UK – and it shows how technology could further heat up the battle for fees. Exo offers AI-powered advice, choosing an investor’s portfolio among 500+ ETFs. It’s hardly alone in the field of AI investing – majors have been there for years – but Exo’s offer is interesting: the minimum investment is £10k and the fee is 0.75% up to £100k, then it drops to 0.50% – a very competitive offering, comparable to single (i.e. no-advice) ETFs.

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