SO HERE WE are – four out of the five big US investment banks have reported their Q1 numbers (Morgan Stanley is out on Monday). And guess what? They’re looking pretty good: just like in the third quarter of last year, FICC was up on the back of bouts of volatility, which boosted rates and currencies revenues. The numbers show that when market volatility picks up, clients come out to play opportunistically to try to make money from the confounded zero-rate environment.
I continue to postulate that, over time, client preparedness to get stuck in when the opportunity arises will continue to feed a more consistent earnings profile for banks that remain committed to them through this cycle of official stimulus and in-process regulation and the distorted markets that derive from them.
On the topic of commitment, I was chatting recently to the head of global markets at a bank that maintains a pretty robust platform and he told me he was receiving a lot more enquiries around derivatives solutions and structured products from institutional clients, and that clients were expressing real concern about the pull-back by so many banks not just from the more exotic hybrid cross-asset products but even from more vanilla products such as FX options.
His comments speak to a host of issues – including the yield environment – but he expressed optimism that the level of enquiry potentially presages the start of a bout of more adventurous client activity.
The level of enquiry potentially presages the start of a bout of more adventurous client activity
IFR’S HEADLINES DURING the week around the earnings spoke volumes: “JP Morgan sees a rebound in FICC”; “Goldman reports highest profit in five years as trading picks up”; “Bank of America profit beats expectations”; “Citigroup posts higher quarterly profit in eight years”. Beyond the obvious benefits to the banks – and their shareholders – of better earnings, it strikes me that if markets (US domestic markets in particular) offer up a sustainable earnings backdrop, it will give the US investment banks and CIBs that benefit from it more firepower to cross-subsidise their European and Asian businesses.
The impact of that over time could be to rip market share from European incumbents, many of which are in any case deeply ambivalent about the benefits of maintaining a heavy global markets presence because they’re hamstrung by the complex regulatory transformation process. I, like many others, believe that unless European policymakers get their act together, they will undermine the ability of their banks to compete on a level playing field. But that’s a story for another day.
BACK TO THE Q1 numbers, the rampant M&A activity that I’ve been commenting on of late showed up strongly in the numbers. Across IBD as a whole, the picture is a little more mixed because – confoundingly – a collapse in US IPO activity (proceeds down 63% year-on-year) took its toll on ECM wallet and undermined the impact of a 69% increase in US follow-ons and an 80% rise in US blocks and ABBs.
I won’t go into all of the detail of all the banks’ numbers as you’re probably tired of them by now but it’s instructive to see the broad trends emerge through the numbers, adjusted of course for the different emphases the banks have around the various segments.
In underwriting and advisory:
• JP Morgan’s banking revenue up 12% y-o-y with advisory playing a starring role (up 41%) and debt and equity underwriting 14% higher.
• Goldman Sachs’ IB net revenues up 7%; advisory also 41% higher offset by a decline in leveraged finance activity that dragged debt underwriting fees 14% lower. And as those ECM stats above suggest, while Goldman’s equity underwriting number did rise on the back of that significant increase in secondary activity it was offset by the decrease in IPO activity.
• IB revenues at Citigroup rose 14% driven by a 70% increase in advisory and a 16% improvement in debt underwriting offset by a 23% decrease in equity underwriting.
• BofA Merrill’s global banking net income rose 6% and the firm reported the highest quarterly advisory fees since the Merrill merger. Advisory was up 50% and ECM rose 10%.
In trading:
• JP Morgan’s total markets and FICC revenues up 20% (excluding “business simplification”) thanks to a good quarter in currencies, EM and rates. Equity trading revenue up 22%.
• Net revenues in GS’s Institutional Client Services group up 23%. “Significantly higher” currencies and rates revenues helped FICC to a 10% increase though the quarter was marred by “significantly lower” revenues in credit products, commodities and mortgages.
• Citigroup’s FICC number 11% lower. A good quarter in rates and currencies spoiled by lower spread product revenues. Equity trading 1% lower although prime finance made a good showing.
• BofA Merrill reported the highest FX sales and trading revenue since the BofA/ML merger, doubling from the 1Q14. Global markets net income fell 8% on the back of lower FICC revenues (down 7% owing to declines in credit and mortgages) and higher litigation expenses. Equities revenues flat.
It’ll be fascinating to see how the European IBs report and the extent to which any clear water starts to emerge between the US and European firms in terms of the direction of travel of the various segments of IBD and trading.
Europeans will benefit from many of the same market conditions as their US counterparts. But Western European IPOs are up 6% y-on-y, and according to Thomson Reuters, are at the highest YTD total since 2000. This will also benefit the major US firms, but because of the distribution profile of European banks’ ECM businesses, the better regional environment is likely to skew in their favour.
But on the basis that products move in their own cycles and rarely in synch, euro-denominated debt issuance stands 22% below this time last year. Swings and roundabouts …