Accelerating extraordinary gains seen in 1Q20, the 15 banks in this report surged capital markets revenue by 35% y/y in 2Q20 to $66bn, with FICC contributing the lion’s share of gains. Costs were tightly controlled, however, leading to a 57% jump in overall pre-tax profits (EMEA banks almost doubled their aggregate profit).
Banks which commented on the matter suggested that 2H20 revenue will be about half of 1H20, with the drop more pronounced in FICC than equities.
The halt in job cuts proved temporary. By early summer, several banks – most prominently, HSBC, Credit Suisse and Deutsche Bank – all resumed their restructuring/resizing initiatives. The full impact will be revealed in 3Q20.
Throughout 2Q20, markets were driven by macro concerns: economic outlook and stimulus, primarily from The Fed; for example, in mid-June, S&P 500 jumped along with credit markets, in direct response to Fed’s announcement that it will start buying individual corporate bonds. Such convergence, in turn, made hedging more difficult.
Year-to-date revenue totalled $52bn, 4% ahead of 6m19. Defying gloomy predictions, the firms in this report maintained their overall profit margins: 29% in aggregate in 6m20, unchanged from the prior-year period (though slightly down from 31% in 1Q20). However, this was mostly due to strong cost control – particularly by EMEA firms – and high business volumes; productivity was unchanged as revenue growth was offset by hiring.
Significant headwinds remain. The ultra-low interest rate environment was exacerbated in 2Q20 by the fallout from Covid-19, which drove deposit levels up and lending down. Loan/deposit levels are stabilising, but with little chance of V-shaped economic recovery – especially in key Western markets – we doubt interest rates will rise anytime soon. Added to this, the decline in fees and trading margins is structural: it is driven by firms targeting same market segments (mega mandates and UHNWIs), broad move to zero trading commissions and clients’ (rather reasonable) demand for performance- and service-based fees over AuM-based ones.