THE PAST WEEK or so saw a magnificent display of inter-related macro news, bank strategy announcements and earnings releases. Just as Fed rate normalisation appears to have become more of a concept than a hard fact, we get Mario Draghi staying firmly put on that monetary easing travelator that looks like it could stretch well into the distance, keeping him on a parallel track to Haruhiko Kuroda, his BoJ counterpart.
At a practical level, that means we only get latent rather than the actual policy divergence. Just as I was wondering how on earth the market was supposed to digest and make sense of wonky central bank positioning in terms of risk and asset pricing and appetite, fund flow tracker EPFR’s latest data fell into my inbox.
It showed that its global high-yield bond fund universe ended the third week of October on track to record its biggest inflow since mid-February, while EM equity funds posted consecutive weekly inflows for the first time since early July. That speaks volumes in terms of how investors are reading the runes.
HY and EM have been a bit of a dangerous play of late but when all’s said and done, I guess reactions are binary. If we’re going to be stuck with rates and bond yields broadly speaking bumping along the zero mark or below for a while longer it’s not the granular details that really matter at this point; it’s about making directional bets. We’re certainly not really much further along the road to full clarity. But then again, when have we ever been?
We are though moving closer step by step to greater strategic transparency in the bank recalibration stakes
TALKING OF CLARITY, though, we are though moving closer step by step to greater strategic transparency in the bank recalibration stakes. Deutsche Bank and Credit Suisse were both out last week with key updates.
DB opted to split its update into two. So we got the tweak to the org structure last week (IB and markets split; AWM to focus exclusively on institutions) and changes to the nameplates on the divisional corner offices. This coming Thursday sees the eagerly awaited update to Strategy 2020.
On the personnel side, CEO John Cryan booted out the last of Anshu’s boys from the upper deck of the bank’s teetering bus. Michele Faissola and Colin Fan are out (along with Stefan Krause and Stephan Leithner); while Jeff Urwin (corporate and investment banking); Garth Ritchie (global markets) and Quintin Price (asset management) are in.
At Credit Suisse, Tidjane Thiam told us pretty much what we already knew: Asia-Pacific, private banking and wealth management, and the capital raise are in and the investment bank will become a support function, resulting in a tonky cost-cutting programme that could see up to 2,000 job cuts.
As I wrote of the broad changes, articulating strategies is the easy bit: executing on them and driving up returns is much more complicated. Let’s hold fire on how brilliant they are until they’ve had time to season.
WHICH BRINGS ME to my final theme this week: Q3 bank earnings. With the best will in the world, the best strategies management consultants can muster count for nothing if the underlying businesses they depend on fail to fire on any or all cylinders in a sustainable manner.
The past quarter was tough for sure for all the reasons we know. But the problem was that it was tough pretty much across the board. In IB, better advisory revenues couldn’t counter the impact of lower debt issuance volumes and a lousy quarter for ECM. Similarly while equity trading was the quarter’s star performer it just couldn’t counteract a truly awful quarter for FICC trading.
On the basis that FICC covers a multitude of business, it was also hard to pinpoint which segments were more to blame (ie, picking the worst of a bad bunch). Citigroup generally blamed lower client activity and a less favourable trading environment; Goldman reported significantly lower revenues in mortgages, a not quite so bad performance in currencies and rates but higher net revenues in credit.
Morgan Stanley, by contrast, noted difficult market conditions for credit and securitised products. JP Morgan put its performance down to lower revenues in commodities, weakness in credit but strength in currencies and EM. Horses for courses, I guess, but it makes the future hard to predict, particularly against those difficult forward conditions I outlined above.
But here’s an interesting stat: taking earnings from JPM, BAML, Citi, GS, MS and CS, if in 3Q14 net revenues from equity trading at a tad over US$7.5bn were just 57% of the US$13.3bn reported in FICC, by 3Q15 the convergence had been dramatic: 3Q15 equity trading revenues (+9%) of US$8.3bn were almost 79% of the FICC aggregate of US$10.5bn.
OK it’s relatively easy to say that was all down to FICC, but with an industry bias clearly in favour of continued de-emphasis on fixed-income in favour of building out equities (witness Citi, JPM, CS), could the convergence continue and break through into more of a widespread trend? I wonder.
Probably not at an industry level any time soon, given the huge differences between debt and equity revenues at Citi, JPM and (to a lesser extent) BAML. But worthy of note, Credit Suisse, Goldman Sachs and Morgan Stanley all posted higher net revenues in equity trading in Q3 than they did in FICC. Start of a trend?
