The big US banks wrapped up their third-quarter results season this week, with Morgan Stanley and Goldman Sachs looking more vibrant in places than their giant commercial cousins.
Revenues were flat or slightly up across the board, with profits climbing more strongly, but investment banking had a happier time at the traditional broker dealers than at the universal banks. (if you want to earning in the currency market use our forex robot)
That broad trend for the quarter didn’t stop JPMorgan CFO Marianne Lake from being able to rattle off a traditional series of year-to-date number-one rankings, including in investment banking fees in North America, in EMEA and globally.
Group revenues in the quarter rose by 7% year-on-year, an increase matched only by Morgan Stanley, and pre-tax profits were up 12%.
As usual on JPMorgan’s call, analysts were looking for macro commentary as much as they were interested in what was going on at the bank. Chairman and CEO Jamie Dimon had previously told shareholders that he was expecting rates to rise, but the market seemed to be having difficulty digesting it.
| Jamie Dimon, JPMorgan |
Mike Mayo at Wells Fargo wanted Dimon’s reaction, and he got it, stirring Dimon out of the background of the earnings call.
People shouldn’t be surprised at rising rates, Dimon said, adding: “I am always surprised when people are surprised.” The economy was growing and it was normalizing in terms of asset pricing and rates – and this was needed.
Lake agreed that current rates were not surprisingly high. JPMorgan stresses its books for shocks of 100 basis points to 200bp, and there was little to worry her at the moment. A liquidity glut had enabled people to be prepared and hedge.
Given the tough climate for bank stocks at the moment, Bank of America Merrill Lynch (BAML) analyst Erika Najarian wondered whether the economy was expected to slow or whether the relationships between bank revenues and US economic growth was broken.
Lake seemed just as puzzled: there was no sign of the economy slowing, a steeper yield curve was expected in 2019, and even if asset growth slowed, it would be at higher spreads. All of that ought to be reflected in bank stocks.
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One-offs at Citi
Citi CEO Mike Corbat put a brave face on what was a fairly unexciting set of results for his firm, describing “solid” growth in many areas. Revenues were flat and profits rose by just 2%, but comparisons were complicated by one-off gains recorded in the same period in 2017.
The bank clocked up a gain of $580 million in 3Q17 from the sale of a fixed income analytics business, and this year the disposal of asset management in Mexico brought in $250 million.
| Mike Corbat, Citi |
Stripping those items out, revenues were up about 4% year-on-year at group level. The same adjustment also took revenues in the institutional clients group up 4%, compared with a reported fall of 2%.
Corbat also flagged the upcoming merger of corporate and investment banking with capital markets origination, saying that the integration of advisory with capital raising would strengthen the focus on clients.
He also said that Paco Ybarra, global head of markets and securities services, would become deputy to Jamie Forese, CEO of the institutional clients group (ICG), taking on responsibility for technology and capital optimization across the bank’s institutional businesses.
While investment banking fees at the firm had fallen as M&A growth had been offset by slower underwriting, Corbat echoed peers by noting that transaction backlogs were strong.
CFO John Gerspach, who will be retiring from the firm after it reports full-year numbers for 2018, went further. He expected ICG revenues to be higher in the fourth quarter than they were in the same period in 2017.
‘We’ve done it again’
He couldn’t trumpet as many number-one positions as Lake, but Bank of America Merrill Lynch chairman and CEO Brian Moynihan had some good statistics of his own – as long as he avoided talking about his investment bank.
| BAML IB hurt by DCM, advisory falls |
| When it came to corporate and investment banking (CIB) results, Bank of America Merrill Lynch (BAML) proved the adage that it’s what you don’t talk about that’s most interesting.
Chairman and CEO Brian Moynihan, not known even in good times for waxing lyrical about his investment banking franchise, was even less likely to spend time on it in a quarter that saw revenues and pre-tax profits fall year-on-year, alongside a bigger fall in debt capital market (DCM) revenues than peers and a 30% drop in advisory. And sure enough, his prepared remarks to analysts this week barely touched on the business, save for one characteristic mention of middle-market investment banking. Moynihan is always keen to reference his 200,000 teammates, but this time it felt like they included precious few in M&A and underwriting. That the analysts quizzing him on the bank’s earnings call also seemed largely happy to ignore the investment bank perhaps told its own story. It didn’t go entirely without comment, however. Steven Chubak, at Wolfe Research, wanted BAML’s CIB strategy explained, particularly given the widely reported perception of a pullback on risk within the division this year, partly in the wake of losses around the Steinhoff margin loan. Moynihan didn’t mention by name global banking and markets head Christian Meissner, who is leaving the firm at the end of the year and is being replaced by Asia-Pacific president Matthew Koder. However, he did note that the team had done a good job in recent years in repositioning the franchise and that COO Tom Montag was bringing in the new leader to “carry us to the next level”. And yet again, he stressed the domestic areas. It was essential to keep the CIB business balanced by not neglecting its home market – in the US, the firm had size and a competitive middle-market offering. A big part of recent weakness had been in M&A, he admitted, where the bank had not got its fair share of business. The key, he added, was to maintain dominance in debt underwriting “and things like that”. The bank stands third in Dealogic’s global and US DCM bookrunner league tables for the year-to-date, and also finished third in both tables for the full year 2017. CFO Paul Donofrio pointed out that things had started to rebound, with announced M&A mandates up recently. “We know we can do better,” he conceded. It wasn’t about chasing the market, however, but renewing the focus and re-energizing the teams – the kind of comment that sounds like it could herald a broader rejig than just at the top of the division. |
At group level, he was able to boast record quarterly revenues, with each of the past 11 quarters showing an average year-on-year growth of 15%, and operating leverage that had improved for the 15th quarter in a row.
Third-quarter revenues rose 4%, but pre-tax profits jumped 18%. In 2015 and 2016, some analysts had questioned the firm’s ability to drive operating leverage, he said, adding: “Well, we have done it again.”
Moynihan certainly loves a chance to talk domestic costs, and he happily catalogued the ways in which the bank had slashed them to drive profits in recent quarters: fewer branches, digital sales up again – they now stand at 23% of all sales – square footage that has fallen from 130 million to 75 million, the installation of an internal cloud with 80% of the bank’s applications now in it, and a cull of 9,000 managers in three years.
However, Wells Fargo’s Mayo wanted to know why BAML was so keen to expand into new US regional markets now, at a time when there was much competition to do so.
Moynihan advised him to bear in mind the history of interstate banking in the US – something that was largely prohibited until the 1980s and only became possible on a national basis as recently as 1994.
It was an historical accident that BAML had ended up short of branch networks in some areas, said Moynihan, simply because of the nature of the acquisitions it had made. The branch expansion the bank was doing now was to underpin that – it was not the case that the brand was unknown.
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Morgan Stanley leads
If Moynihan was happy, the boss with the most to be pleased about was probably James Gorman at Morgan Stanley, the firm that now has the highest trailing-12-month increase in group profits, CIB revenues and profits – and almost the highest increase in group revenues.
Its third quarter was impressive too, tying with JPMorgan for a 7% increase in revenues (to $9.9 billion), second placed on profits with a 15% rise, but leading in CIB revenue and profit growth, at 13% and 26%, respectively. Revenues also grew at DCM when they fell at all peers.
Gorman likes to make sure his audience remembers just how much his firm is doing now with just how much less than in the past. The last time Morgan Stanley posted third-quarter revenues of $9.9 billion, he noted, it had a leverage ratio of 30-40.
It comes amid an already strong year: the firm has only twice recorded revenues of more than $10 billion – in the first two quarters of 2018.
However, like Lake at JPMorgan, Gorman wondered why the firm’s stock wasn’t reflecting the performance or the potential. Return on equity was up, the firm was hitting its profit margin targets, the compensation ratio was better than targeted, and yet the stock was down about 8% year to date.
| James Gorman, Morgan Stanley |
“I guess there are smarter investors than myself out there who have got this figured out,” he said.
He was equally baffled by the apparent scepticism of investors about the ability of the firm to translate revenue growth into operating leverage.
“I don’t understand that view,” he said, citing the firm’s scale and its ability to increase profitability even while it has made investments. “There’s just no way if you make another $3 billion of revenue, you’re not making it at a higher margin.”
Handovers at Goldman
Over at Goldman Sachs, meanwhile, it was all thank-yous and handovers, with outgoing CFO Marty Chavez taking the opportunity to introduce the incoming Stephen Scherr to analysts this week.
With chairman and CEO Lloyd Blankfein handing over the reins to David Solomon, Chavez is being packed off to be another co-head of securities alongside Jim Esposito and Ashok Varadhan.
It’s a division where he has been before and a role that should suit his automation instincts better. He politely said he had “really enjoyed” talking to analysts, but he sounded like he was going to enjoy thinking about technology platforms a whole lot more.
Scherr wanted to set out his stall early. He had two key priorities, he said, although neither was particularly surprising.
One was to do more to deliver the whole of Goldman Sachs to clients – and to expand that range of clients, along the lines of the revenue growth commitments that the firm announced about a year ago – on which he promised to give an update in November.
| Stephen Scherr, Goldman Sachs |
The second was to review all businesses to check that capital and resources were being properly deployed.
There was a treat in store for the analysts that cover Goldman, however: incoming CEO Solomon would join the next earnings call in January, although whether the presence of a part-time DJ would herald a change to Goldman’s usual hold music of Take Five was left undiscussed.
Goldman’s third-quarter year-on-year performance was not as impressive as Morgan Stanley’s, but the firm saw profits rise 3% on revenues that were up 4%.
Mayo at Wells returned to a familiar theme, wanting to know – as he did on the full-year earnings call in January – what the firm could do to get its fair share of business given how “you crush it with CEO relationships”.
In January, the question had been specifically related to the FICC business; here it was more general. And Scherr was up to the task.
The investment banking relationship at Goldman, he explained, had historically gone to the very top of a corporate, but it had broadened a lot over the years – and particularly since the financial crisis, as liquidity had become a strategic question for firms.
However, Scherr also referenced Goldman’s growing willingness to lend to justify business. “Our relevance has grown considerably, commensurate with credit extension that we have made to a number of our clients,” he said. “So, our petition for a broader set of business is more real and more credible than it has been for a long while.”
And he offered a vision of the future that will doubtless terrify rivals, related to the firm’s plans to expand into cash management.
“I view us as having an extraordinary set of relationships with corporates to build that business on a technology platform that will be rather edgy,” he said. “I would point out that when you look at the tangible addressable market that that represents relative to the traditional product sets that we’ve been in, it almost doubles.”
| Marty Chavez, Goldman Sachs |
Just imagine, he added, how Goldman could grow by extending its product set to corporate cash management.
Doing more with corporate clients was a key objective of Goldman’s commitment last year to find an additional $5 billion of annual revenues irrespective of any improvement in market conditions.
The revenue initiative was billed as partly in response to a disappointing performance at Goldman’s FICC division. And although that business saw a 10% year-on-year drop in revenues this quarter, matching JPMorgan, it is now down just 4% on a trailing-12-month basis – making it the best performer on that metric.
Despite his love of automation and platforms, Chavez is not one to entertain technological development for its own sake – he still uses an HP 12C financial calculator, first produced in 1981 and barely changed since.
However, he was confident that the firm’s investments in technology, and increasingly making that technology and data available to clients via APIs, would help to drive the fixed income and other businesses.
And as important was a focus on the wallet share with the top clients, Chavez said. The firm now tracks week-by-week where it sits with the top 1,300, and, according to Coalition, Goldman was number two in FICC with that client set in the first half of the year. Read more forex news…
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