STOCKS OF LARGE US banks off to the races on upward-sloping inflation expectations off the back of US public spending talk, brighter earnings possibilities emanating from a normalised yield curve, and anticipation of regulatory roll-back; Primary US high-grade debt capital markets storming; US Treasury yields on the rise; the DJIA closing at an all-time high Thursday. Anyone would think there’d been a major event in the US this past week!
Global capital and financial markets may initially have wobbled on Donald Trump’s election victory but history has taught us that, in their day jobs at least, market professionals whether they’re buyside, sellside or from the issuing community are less ideologues; more opportunism-tinged pragmatists thinking about tomorrow only with a view to arbing it to optimise deliverables today.
Nothing wrong with that, but as the US president-elect’s impenetrable policy fog morphs into a swirling misty haze, a superficial non-partisan view suggests it’s far from all bad news for US banks and segments of the US corporate sector. On bank regulation, Trump had supported the thrust of Jeb Hensarling’s Financial CHOICE Act, which seeks to blow up Dodd-Frank and the Volcker Rule in favour of a more libertarian framework.
THERE’S NOT MUCH more one can say at this stage pending the detail. But on the basis that US banks look increasingly like they have a brighter future, I thought it’d be a perfect time to go back to the question I posed two or three weeks ago when I wrote a wrap on US banks’ Q3 IB and trading numbers: are US bank results an increasingly poor guide to the performance of their European counterparts?
Is it reasonable, I asked, to expect US and European bank performance data to start to contain more arresting quarter-on-quarter divergences either in swing intensity or directionally? As a hedge, I’d set up my observation interrogatively since few of the major European CIBs had reported that that stage. But now that they have – and I’m talking Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, HSBC, SocGen and UBS – I’m glad I did since my premise wasn’t overtly borne out this past quarter. But it will be…
I think many people were surprised by European bank earnings as a whole, given various regional and idiosyncratic headwinds. A qualified look at core 3Q16 data certainly doesn’t support any major year-on-year US/Europe discrepancies, leaving aside the higher earnings quantum that US banks have long had, plus a more varied picture – but only relatively so – among European banks still in the throes of restructuring.
As a core group, ie. taking out outliers in both datasets, the Europeans matched the 40%-plus average rise in fixed-income trading reported by the US banks. They matched the average 10%-plus rise in underwriting and advisory, and the flattish to mildly negative equities performance (although individual performances here varied wildly). And total IBD plus trading numbers were more or less the same (plus or minus 20%) in both camps.
Vexing
Mind you, to get to any conclusions, I had to engage in a fair amount of jiggery-pokery around the European banks’ numbers. I’ve got to say their IBD product disclosure – or more to the point non-disclosure – is pitiful. I did venture to make some guesstimates in my analysis, but in a limited way in the absence of any real steer from the banks I reached out to for guidance. If you look at the IFR website, I’ve produced some tables where you can see the result of my guesstimations, with non-dollar totals translated at average Q315 crosses.
WHY ON EARTH do UK and French banks report their fixed-income and equity trading numbers when they don’t provide any hard data on ECM, DCM or advisory? It’s vexing. And there are degrees of reporting opacity and differences.
BNP Paribas reports DCM as part of fixed-income trading but doesn’t break it out. Advisory sits in corporate banking. As does ECM, which to complicate matters even further is shared with broker Exane (BNPP handles origination; Exane handles research and distribution).
At CS, global markets revenues are broken down into equities, credit and solutions. But equity derivatives (not broken out) is part of solutions rather than equities so sits in the same bucket as rates, FX and emerging markets.
UBS breaks out DCM, ECM and advisory but also has a separate financing solutions line in CCS that includes leveraged and real estate finance, and special situations. HSBC reports ECM, DCM and advisory under Capital Financing, but the latter also includes asset finance, leveraged and acquisition finance, project and export finance, as well as relationship-based credit and lending. Capital markets and advisory are not broken out.
So … piecing it together as best I could … a shout-out to Barclays, whose year-on-year growth across IBD and trading was best-in-class. Sentiment towards Barclays does seem to be turning and Jes Staley is winning plaudits. HSBC, BNPP and SG pulled off creditable performances, leaving Deutsche Bank (predictably given what’s going on there) and the Gnomes of Zurich pulling up the rear-guard.
One thing that is remarkably consistent is that even with some notable divergence between individual firms, the US Big Five broadly generate twice as much net revenue as the European Big Seven. That goes for underwriting and advisory (average of US$1.4bn for the US banks vs US$721m for the Europeans); FICC (US$2.8bn vs US$1.3bn); equities (US$1.34bn vs US$586m); and total trading, underwriting and advisory (US$5.6bn vs US$2.5bn).
I can only see quantum differentials between the US and Europe moving inversely. As the US lightens its regulatory burden and the US economy expands through infrastructure-led growth while Europe continues to be caught in the long grass of full regulatory certainty and bank rehab, Brexit, and a less-than-rosy macro outlook, my observation about directionality and swing intensity looks to be game-on.
