Sector: Wholesale Banking Review 2Q19/6m19

Capital Markets: Summary

The aggregate 6m19 operating revenue of banks in this report totalled $96bn, 8% below 6m18 mostly due to weak Equities revenue – and pre-tax profit dropped 14%. US banks outperformed their EMEA peers across the board, except in FICC profitability, which benefitted from cost-cutting.

The final version of the Volcker Rule – which applies from 1-Jan-21 – eases restrictions on prop trading and investing in private equity and hedge funds. Banks with consolidated trading assets and liabilities of $20bn will be subject to six-pillar compliance and annual CEO attestation. Mid-size banks are now subject to simplified compliance (importantly, <$10bn banks can immediately invest in PE and HFs); and <$1bn banks are ‘presumed compliant’. Also, the new Rule exempts certain trades for underwriting, market-making, hedging and trading by foreign banks outside the US. These amendments won’t make much difference to trading behaviour (or revenue) of ‘our’ banks, but they will ease the burden of compliance and make PE/HF investments easier – and that’s good.

In May-19, in preparation for a no-deal Brexit, several major banks moved some of their swaps from London to Frankfurt; the current intention is to repeat the exercise at regular intervals. So far, though, the volume of business flowing through banks’ UK arms has not declined much, implying that banks are ready for ‘hard’ Brexit and/or that they don’t believe Brexit will happen.

Commercial Banking & Treasury Services

After a brief pause in Mar/Apr-19, commercial lending in the US and large EU economies continued a steady – if very slow – growth in 2Q19. Margin pressures, however, intensified in the USA, the EU and APAC – especially in the LME sector – and several of ‘our’ banks reported higher hedging costs.

In transaction banking, 1H19 payment volumes grew 5%, led by Americas and APAC.

The pressure from new entrants – e.g. trade networks – grows. Payment services, FX, liquidity pools and trade and supply chains – all core transaction businesses – are generally seen as the most threatened in the near term. A smaller – but growing – threat comes from private banks’ DAC services – see overleaf.

Trade finance volumes declined modestly versus 1H18.

Wealth Management

New arrival: Goldman Sachs

The aggregate 1H19 pre-tax profit for the 13 banks featured here was slightly below 1H18. However, there was a visible divergence between EMEA and AMER banks: the latter grew profits by 4% y/y while their European counterparts saw their combined profits drop 17%.

In most markets, clients continued shifting money from funds (especially equities) into cash, pressuring banks’ margins. Weak net interest income and transaction revenues are pushing banks to other activities: advisory (in few select cases) and, more significantly, lending. Goldman Sachs, Morgan Stanley and BAML are all looking to (continue to) grow their lending portfolio with big numbers, and DBK recently started offering loans for high-end homes in London – without collateral. The main attraction of the lending business is that it is ‘sticky’, especially with hard-to-value loans; and, importantly, banks in this report have very low loan loss rate.

Several US banks are moving into large European markets.

Direct Access (DAC) services are rapidly gaining ground, particularly in APAC. DACs offer services very similar to ‘traditional’ Treasury – hedging, cash management and financing – and their main clients are family offices, which are frequently led by a person/team with Treasury backgrounds. For the moment, FX services appear to be the most popular, with several banks reporting double-digit y/y growth; but there is little doubt other products and services will grow, and soon.