When the five biggest US banks reported eye-catching gains in fixed income, currencies and commodities (FICC) trading revenues for the third quarter of 2016 over the same quarter in 2015, investors in European bank shares wondered if they had benefited at the expense of European rivals.
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John Cryan, Deutsche |
JPMorgan reported FICC revenues for the third quarter of this year 48% ahead of the third quarter of 2015, while revenues at Goldman Sachs were up 49%, at Bank of America up 39% and at Citi up 35%.
Morgan Stanley was the outlier, with revenues up 154% year-on-year. For the big five US firms, the average gain was 49%.
The usually quieter third quarter of 2016 even saw an improvement over the normally busier second quarter, with average FICC revenues up 6% over the sequential quarter for the big five US firms.
The US firms reported stronger revenues across a wide range of products, but notably in macro rates, driven by higher volumes from customers positioning for divergent views on Brexit and the future direction of interest rates. Credit also did well, as spreads tightened.
However, the chatter from US banks also spoke of market share gains from the European banks and so investors in Europe feared a continuation of a familiar narrative of failure and loss.
Such pessimism might have been overdone. While Deutsche Bank’s stock remains overshadowed by uncertainty around the eventual settlement with the US Department of Justice (DoJ) on residential mortgage-backed securities, there was good news buried in its results.
Debt sales and trading revenue in the third quarter of 2016 were a more modest 14% ahead on the third quarter of 2015 and also 13% up on the prior quarter of 2016.
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Marcus Schenck, |
Chief financial officer Marcus Schenck says that while FX revenues were flat, the growth came because “rates revenues were significantly higher year-over-year driven by strong performance in Europe. We saw robust deal-flow and interest-rate swaps with both corporate and public sector clients.
“In addition, our credit trading business benefited from higher client flows and improved market conditions.”
It’s worth remembering that Deutsche captured these revenues in a quarter where near panic set in around the DoJ settlement during the last two weeks in September and short-sellers pounced on stories of certain hedge fund clients cutting exposure to the bank.
Yet Deutsche actually turns out to have done more client business, not less, at a time when own account principal risk-taking is at multi-year lows.
Could it have done even more? John Cryan, chief executive, admits: “We don’t know how much new business was impacted, but we know that when our name is in the headlines for the wrong reasons, the phone doesn’t ring as frequently.”
The biggest reason why Deutsche achieved smaller revenue gains than its US rivals is that restructuring has forced it out of some of the businesses that are doing best. Schenck says: “We did not benefit to the same extent as our peers given the smaller size of our US credit platform. Furthermore, we did not participate, in particular, in the strong performance of securitized trading like our US competitors did, given us exiting this business.”
The bank has also been getting out of emerging markets and gave up revenues especially in Asia-Pacific.
Investors in the bank’s stock have to hope that while the global markets business at Deutsche – which also includes equity sales and trading – continues to shrink, it can yet become more profitable.
Restructuring continues and the costs of this, as well as goodwill impairments and regulatory pay-outs, make quarterly comparisons hard.
However, for the first nine months of 2016, global markets has managed to produce a return on tangible equity six percentage points higher than for the first nine months of 2015, even while revenues are down by 16%.
Key driver
A key driver of this has been the bank taking compensation in global markets down by 25% over the first nine months of 2016. Partly that reflects lower bonus awards from a loss-making year in 2015 that are now vesting in 2016. The bank has also moved junior staff off bonuses and fixed their pay.
Deutsche talks the talk. Schenck knows what investors want to hear.
He says: “Our fixed income business is going to be likely a bit more stable and less seasonal than it was in the past. We still expect this to be one of our strongholds going forward.”
No investor with any sense will take on trust the notion that Deutsche Bank has achieved a step-change in its cost-income ratio or that higher revenues in markets businesses are more dependable.
However, raising client revenues in a business the bank is shrinking during a quarter dominated by questions over its capacity to withstand the next big regulatory settlement deserves at least a nod of appreciation.
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Jes Staley, Barclays |
Barclays enjoyed a far stronger quarter than Deutsche, with third-quarter revenues in sales and trading of macro rates products up 26% on the third quarter of 2015 and credit up 74%.
Andrew Coombs, banks analyst at Citi, says: “This is an encouraging result, though Barclays still underperformed US peers.” But not by much, it didn’t. Citi models a 40% rise year-on-year in quarterly FICC revenues at Barclays.
Barclays CEO Jes Staley talks bullishly of gains in the connected investment banking businesses and is in no mood to concede to anyone.
He says: “We gained market share, particularly in the United States about 50 basis points, if you look at M&A, ECM and DCM.” And he adds: “It’s not just us versus the Europeans.”
Staley is far too experienced to say that the recent improvement marks an end to volatility in investment banking earnings. They might no longer reflect bets on market direction and Barclays has clearly adopted an agency model in investment banking centred on the UK and the US, but revenues still heavily depend on volumes of client business.
“So, volatility in investment banking is not done,” Staley says. “Hopefully, we’ve made some structural gains in terms of our share.”
