Capital Markets: Overview
Based on Tricumen’s new product and headcount definitions
The 16 banks’ aggregate capital markets revenue reached $184bn, unchanged from FY17. Operating costs., however, grew 3% y/y, leading to a modest decline in pre-tax profits. Extending the patterns of previous quarters, AMER banks again outpaced European peers on both revenue growth (+4% vs -4%) and profits (flat y/y vs -8%) in all areas except Equities. Redundancies added to the seasonal cull of personnel and the bonus season, as anticipated, produced few victors and lots of doughnuts, especially at European banks.
A surge in prop and principal investments revenue was entirely due to strong performance by US banks: European banks suffered a 26% decline from already modest FY17 levels. BNPP closed its prop trading unit, Opera Trading Capital, in Jan-19; SocGen shut down the Hong Kong arm of Descartes and placed London and Paris operations ‘under review’.
The halcyon days of recruitment in Support/Control functions are coming to an end: most banks in this note are reviewing their staffing requirements – even in hitherto sacred Compliance! – and looking at ways to utilise automation and better processes in reducing headcount and/or cost.
Commercial Banking & Treasury Services
New arrival: Barclays
Despite some margin compression, commercial lending grew in the US by c.4% y/y in FY18. Lending in major European economies declined 10% y/y due to a combination of tightening net interest margins and lower business volume. The US registered a sharp drop: the volume of new loans to businesses was down 20% y/y.
In transaction banking, FY18 payment volumes grew 10% vs FY17, with APAC and AMER accounting for the majority of the uplift.
Technology investment has been a common theme in 2018; this, together with the quality of the client relationship offering has become the factor in clients’ buying decisions. Many banks have also been looking at the integration of payment systems and processes serving business, SME, large cap and MNC clients. Cyber security has also been a growing concern for clients.
Trade finance grew modestly in FY18, reversing the contraction seen in previous quarters. That said, APAC remains a concern, not least due to the ongoing uncertainty regarding the US-China trade talks.
New arrival: Royal Bank of Canada
Despite the spike in volatility in 4Q18 – caused largely by US-China tensions and the normalisation of The Fed’s monetary policy, but also Brexit and the US Government shutdown – the FY18 operating revenue for banks featured here grew 4% to $101bn on higher margins and loan volumes.
Heavy hiring (at least until the 4Q18 sell-off) and considerable tech investment led to a modest growth in costs; but the resulting pre-tax profit was still up a very respectable 8% y/y, heavily skewed in favour of European banks – their FY18 pre-tax profit jumped 20% y/y, compared to mere 2% for North America peers.
Trends likely to shape 2019: (1) continued popularity of ESG investments – increasingly driven by large institutional investors; (2) a modest shift away from robo- and back to human advisors – assuming the market volatility persists; but also (3) more visible differentiation between the quality of model portfolios on offer; (4) more outsourcing/networking via platforms.
On a related note, in APAC, banks are reporting an increase in discretionary mandates – and a very profitable and recurrent revenue stream – from (U)HNWIs. There is plenty of room for further growth: according to a large market participant, only 8% of APAC portfolios are discretionary, compared to 30%+ in Europe. Market leaders – CS and UBS among them – have already recorded c.20%+ annual growth in this area.