Sector: Wholesale Banking Results Review 2Q18 / 6m18

Capital Markets: Overview

The operating revenue of Top 16 banks reached $105bn in 6m18, a $6bn y/y increase. Overall, European banks outperformed their US peers in primary/Banking revenues (+4% vs -1%), but American banks reported a 12% y/y increase in sales and trading (to $47bn) versus just 1% for European banks. Pre-tax profits for all 16 banks grew by 3%, entirely due to strong Equities; US peers grew 6m18 profit by 7% y/y, while Europeans’ profits shrank, by 8%.

In late May-18, President Trump signed into law a measure which exempts smaller banks from certain Dodd-Frank rules – most notably, the ‘Volcker Rule’ on prop trading. The ban on prop trading for big banks remains in place, but with less red tape to consider; and this change suggests that further weakening of the Volcker Rule is on the cards. To our mind, this is a positive development, mostly because we view Volcker Rule as unnecessary: prop losses totalled <4% of total losses and writedowns sustained by 15 US and UK-based banks during the Crisis; and their prop gains in FY07-FY10 comfortably exceeded those losses.

Commercial / Transaction Banking

The combined revenue of eight banks in our (current) universe reached $51bn, 7% ahead of the prior-year period. Growth was driven by double-digit increase in payments volumes; APAC grew the most, followed by the US and then Europe. The commercial lending volumes in the US increased 4% while European volumes were largely flat. Treasury Services jumped 13%, and per-head productivity increased at a similar rate. Our sources are generally optimistic regarding the near-term outlook …

… but Bain & Co. recently highlighted worrying trends in transaction banking. The sector is becoming both overcrowded and tech-intensive; and, on a related note, the consulting firm estimates that distributed ledger technology has the potential to reduce the trade finance operating costs by 50-80%, depending on the take-up among the participants. We note that, in June-18, BNPP joined the ING Ventures-led funding round to develop the UK-based, blockchain-powered TradeIX platform. TradeIX’s Marco Polo project focuses on the connectivity between trade participants in risk mitigation, payables finance and receivables finance. J.P.Morgan‘s Treasury Services, for its part, launched a pilot of AI-powered service which will help its corporate clients move funds around the world – and anticipate their needs.

Wealth Management

New arrival: HSBC

Banks in this note grew their 6m18 revenue by 6% y/y, to $46bn; extending the trend of recent years, advisory revenue stalled, while all other areas grew at a healthy rate. Pre-tax profit jumped 9% to $13bn. The outlook is uncertain: some banks pointed to headwinds in transaction revenues, and/or a higher interest expense due to diversification of sources of deposits.

Several e-initiatives are worth highlighting. J.P.Morgan launched Digital Investing robo-advisor in Mar-18 and then YouInvest, a new digital brokerage service for 47m existing users of the bank’s banking app or website. UBS launched Advice Advantage, an auto-advice platform developed with robo-advisor SigFig, and then, in June-18, reinvested in SigFig. Elsewhere, Blackrock is making inroads with Alladin, its risk analytics software – Morgan Stanley (which is, alongside Wells Fargo, is seen as the most focused on new tech in wealth) and UBS are among Blackrock’s early customers.

Reorganisations: Wells Fargo may combine wealth brokerage services and the private client group, two units with a wide overlap. Credit Suisse will split IWM into seven key regions from 1-Sept-18.

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