What they said about CIB in 2Q19: a guide to bank results

Most of the corporate and investment banking (CIB) earnings commentary from banks this quarter was on their markets businesses, rather than debt and equity capital markets (DCM and ECM).

The latter were mostly a little weaker than the previous year. Pipelines were often seen as more muted heading into the second half of the year, partly for seasonal reasons but also on fewer acquisition-financing opportunities as well as continuing concerns over trade. However, the changing rate environment was seen as potentially spurring new issuance in DCM.

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Investment bank quarterly heatmaps

numbers are percentage change for 2Q19 vs 2Q18 and for latest 12-month period vs previous period

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What they said about…CIB
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

Bank of America Merrill Lynch (BAML) (flat, -2%): Best earnings quarter ever. New boss Matthew Koder and the team have done a good job, and the bank said it ranked first in volume for US IPOs in the first half.

IB fees were still down 4% year-on-year, but the bank cited Dealogic statistics indicating that the fee pool is down 21% for the industry. It wasn’t “that we ever had a problem in investment banking”, but CEO Brian Moynihan thinks the bank should be top three and there had been “slippage”.

Better performance was down to reinvigorating the focus, he said, as well as from recent additions of investment bankers dedicated to the mid-market, with more to come.

Barclays (+8%, -2%): Overall gained share in IB fees in the first half, and global ranking improved to sixth globally and fifth in the US. Excluding a £166 million gain related to the Tradeweb IPO, the markets business was down 9%, in line with US peers.

A reduced fee pool in debt was partly mitigated by a better result in advisory. Banking fees were down 1% (5% in dollars), reflecting a lower fee pool particularly in DCM. The capital markets pipeline was very good, and the bank said it was still accreting market share in the markets business.

BNP Paribas (+4%, -1%): CIB is continuing its transformation plan across three axes: streamlining of activities, intensification of industrialization and selected growth with target clients.

The latter is illustrated by the proposed deal to acquire Deutsche Bank’s prime broking and electronic equities platform, which might be signed in September. The bank has leading positions in euro-denominated bonds, high-yield and loans. A lacklustre context for the markets business, but a good performance with revenue only down 1.2% on a comparable basis.

Citi (flat, -1%): Continued growth in the accrual businesses but pressure in market-sensitive lines and also in IB, although it gained share. Mark-to-market losses on loan hedges in corporate lending ($75 million in the quarter, $306 million in the first half) as credit spreads tightened, which mostly offset the gain from the Tradeweb IPO.

Overall institutional client group revenues were down 3%, and flat including the Tradeweb gain. The bank is focusing on more digitization and improving on-boarding. Growth in transaction services is not really linked to the rate environment, it was more about multinationals and emerging clients going into new markets.

Part of the weakness in capital markets and the institutional business was secular, but most was cyclical, related to central bank intervention and quantitative easing. When that winds down there will be an opportunity for players to step in and provide liquidity and leadership. IB client dialogue remains strong,

Credit Suisse (-3%, -9%): The second quarter after the completion of a three-year restructuring. Asia IB was well up, with completed deals among the highest in the past two years. IB revenues overall are up 27% in dollar terms compared with 1Q19, a good result given a flat fee pool across the Street.

The collaboration with wealth management is paying off, but results were down year-on-year on concerns over trade negotiations and slowing GDP growth. Unlike peers, Credit Suisse booked the Tradeweb gain in 4Q18, but the markets business was still up 8% year on year. Swiss IB revenues were up.

Deutsche Bank (-18%, -13%): Latest transformation already under way, including negotiations to sell prime finance and electronic equities platform to BNP Paribas. In cash equities it has exited positions and the shutdown of systems is in progress. More than 900 staff have been given notice.

The bank still played a lead role in what it says were 16 of the top 25 fee events in 1H19 and it was the top EMEA high-yield firm. It rose from eighth to second in the Euromoney FX survey. Work has begun to stabilize the revenue base in the core investment bank and to build a foundation to drive returns higher. IB revenues were down 12% yoy, but only 4% after stripping out exceptionals.

CEO Christian Sewing says: “I could make excuses about how the performance in our core business was in line with our US and European peers and there was material disruption around our business in the quarter, but that simply doesn’t matter. We must do better, and we will do better.”

Strategic hires in origination and advisory are intended to help gain share, but the bank’s business mix is more aligned to Europe and leveraged finance than some peers, so conditions are tough.

There is an opportunity in the US and in US dollar product, particularly as that is where the strength of the bank’s asset-backed securities (ABS) and commercial real estate (CRE) franchises lies. Since the announcement of the restructuring, the bank says it has won IB mandates and not lost any.

Goldman Sachs (-5%, -4%): Slightly down on last year but a solid performance. Ranked first in global announced and completed M&A, and first in global equity. Big gains from private equity investments within the investing and lending division.

Realigning the special situations group into four pillars: private equity, growth equity, private credit and real estate. The aim is to have more recurring fee revenues. A continuing focus on building out electronic execution in equities and fixed income, currencies and commodities (FICC) as well as broadening out the client base to corporates, including building in transaction banking and cash management.

HSBC (-13%, -3%): The outlook has changed: given rates and revenue headwinds, the bank no longer expects to meet its 6% return on tangible equity (RoTE) target in the US. Expects recovery from first-half conditions in the global banking and markets division in the second half of the year.

Focus is on sustainable finance agenda as well as investments in digital to improve customer experience. Revenue down in global markets and global banking, but growth in transaction banking. Banking hurt by lower event-driven activity and tightening credit spreads on portfolio hedges.

JPMorgan (-3%, -3%): Ranked first in IB fees globally. Markets performance steady on slightly lower client volumes due to slightly higher global macro and geopolitical uncertainties. Markets boosted by the Tradeweb IPO gain, otherwise was down 6%.

“Our capital cup runneth over,” says CEO Jamie Dimon. On legacy platforms versus fintechs building from scratch: “The hype has been around now for the better part of a decade, and we seem to be doing fine. Some of these legacy platforms are also the reasons why you have 50 million customers.” But it was true that they needed to be reformulated over time, he said.

Morgan Stanley (-11%, -8%): A solid performance against a mixed market backdrop. Stronger performance in the Americas was offset by softness in Asia IB, including in M&A, which was notably down, driven by reduced cross-border volume. Pipelines are healthy, driven by companies looking to improve their growth profile. A healthy backdrop for M&A.

Société Générale (-6%, -1%): The reorganization of the global banking and investor solutions unit is already being executed a few months after being announced. IB activities sluggish in Europe. Challenging market conditions are hitting sales and trading businesses. Financing businesses are doing well. Refocusing on equities and prime as well as developing in financing and advisory.

Proprietary trading unit Descartes Trading is in run-off. Over-the-counter (OTC) commodities is being closed. Asset financing is good, especially in aircraft and property. Energy project financing also good, as well as mining and metals. Transaction banking is up 19%.

UBS (-4%, -11%): A strong IB performance but revenue pressures will persist. Looking at how to evolve the model, leveraging technology and focusing on the highest growth opportunities. Also enhancing the collaboration between wealth management and IB. Technology spend saw costs up 3% year-on-year while revenues were down 4%.

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What they said about…FICC
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

BAML (-8%, -8%): A weaker environment and lower client activity across most products. Lower bonuses took expenses down 2%. Revenues are weighted towards credit. There were no days with trading losses. Average assets in global markets were up by 1% on increased FICC inventory in anticipation of higher client demand.

Barclays (+25%, +8%): Outperformance: up 2% if you exclude a gain from Tradeweb. Strong performance in credit and good growth in securitized products. The Tradeweb gain also took overall markets revenues up 7% versus down 5%.

BNP Paribas (+9%, +3%): Revenues up 11.7% if you strip out the effect of the new capital markets platform, which moves €22 million of revenues into the corporate banking unit. Good growth in FX, credit and primary issues (some of DCM sits within FICC at BNPP).

Challenging environment in the rates business, especially in Europe. Performance was driven by transformation of the business into either very industrialized or very bespoke.

Citi (+8%, flat): A gain of $350 million from Tradeweb. Without the gain, fixed income was down 4% reflecting a challenging environment, particularly in rates. Volatility around rate movements played out with Citi’s investor client base. Corporate activity was stable, especially in rates and currencies, and where there was strong linkage to the firm’s transaction services business. But investor client activity was down.

Credit Suisse (+7%, -7%): Outperformed peers in securitized products and saw an increase in global credit. In Asia, revenues were lower in emerging market (EM) rates products on less client activity, but credit and structured product revenues were up.

Globally, securitized products were up, driven by the firm’s asset finance franchise and much higher agency trading activity. Credit was up on better client activity, but leveraged finance trading was down. EM structured credit and financing revenues were down in EMEA, after a good 2Q18, but there were higher financing and trading revenues in Latin America.

Deutsche Bank (-4%, -15%): Down 11% if adjusted for a one-time valuation adjustment of €101 million. Resilient performance in credit, but offset by the impact of lower volatility on FX. Rates showed a solid performance when adjusted for the resizing of the business.

Up to second from eighth in the Euromoney FX survey. An underlying solid performance in FX is not expected to change in 2H19. The impact of credit spreads on risk-weighted asset (RWA)-related hedges hurt revenues, but core franchises are good. Credit revenues were up, particularly in CRE and ABS.

Goldman Sachs (-13%, -12%): “Significantly” lower revenues in interest rate products and currencies, and lower in credit, but higher in commodities and mortgages. EM revenues also down on tariff and trade concerns, which are driving sentiment more than economic data. Uncertainty around Federal Reserve rate direction also weighed on markets, although that started to clear up late in the quarter.

Implied and realised volatility in major currency pairs was at historic lows, so there was low activity with clients there. Commodities was strong, including in oil, gas and power. Mortgage revenues were up. Credit inventory was down on investor caution. There was lower structured finance client activity. A lot of focus on automatic workflows and serving clients electronically. Also, a focus on expanding out to corporates.

Goldman is much more weighted towards market intermediation than some peers, with 90% of FICC revenues there, so is more sensitive to low client activity. However, it is working to create a more captive FX business through the build-out with corporates and also through its efforts in transaction banking and cash management.

HSBC (-14%, -6%): Revenues down on low volatility and spread compression, but partly offset by higher flow in rates business.

JPMorgan (+7%, -10%): Boosted by a gain from the Tradeweb IPO: without that markets was down 6% and FICC was down 3%. Weak in EMEA across products, but there was increased client activity in North America rates and agency mortgage trading as the rate environment changed.

Morgan Stanley (-18%, -12%): A decline in rates and subdued structured transactions. Partly offset by an increase in credit on robust client activity. Results were at the lower end of expectations. Rate movements hurt the rates business and low volatility subdued FX. Credit was strong by historical standards on the back of securitized products.

Société Générale (-10%, -14%): Down on a low rate environment in Europe and low volatility in currencies, but performance in credit and EMs helped to mitigate this.

UBS (-22%, +4%): Fall was 7% if you exclude $100 million of income in 2Q18 that was related to the recognition of previously deferred day-one profits, which were subsequently recognised due to enhanced observability and revised valuations in the funding curve used to value UBS interest rate-linked notes.

This quarter includes $38 million gain related to Tradeweb. Credit and rates were good, but there were declines in FX.

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What they said about…equities
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

BAML (-13%, -7%): Performance mostly down to weaker EMEA derivatives than a strong prior-year period.

Barclays (-14%, -4%): Challenging compared with a strong quarter last year, which had been a record.

BNP Paribas (-14%, -27%): Down compared with a strong 2Q18 and also due to drop in prime services, but equity derivatives showing a good level of client activity. Deal with Deutsche Bank on prime and electronic equities progressing faster than expected, signing could be in September.

Citi (-9%, -7%): Lower client activity in cash and prime services, on trade concerns among investor clients, but there was strong corporate client activity in derivatives. Engagement stays good and the bank says it is continuing to gain share.

Credit Suisse (flat, -5%): Higher in cash and prime services, especially in listed derivatives, but lower corporate client activity in derivatives. Asia prime services revenues were down. Cash equities was up on better trading in the Americas although it was lower in EMEA.

Deutsche Bank (-32%, -18%): Fall partly due to strategic reshaping that was announced in 2Q18, and then lower client flows in 2Q19 due to the market anticipating the downsizing of the franchise. Big reductions in cash and prime services, reflecting market uncertainty around Deutsche’s strategy.

Goldman Sachs (+6%, -1%): Second best quarter in equities in four years, higher in cash and derivatives. Continuing investment in low touch and in servicing systematic clients. Results reflect continuing consolidation of market share. Commissions and fees up, helped by EMEA and by low-touch execution.

HSBC (-18%, -15%): Revenues down on low volatility and spread compression.

JPMorgan (-12%, -2%): Lower in derivatives and also against a strong prior-year quarter. Cash and prime services stable, and client balances in prime reached a record.

Morgan Stanley (-14%, -8%): Lower revenues in financing reflected lower client balances and lower realised spreads, but the firm expects to remain number one. Activity peaked mid quarter and subsided later.

Prime broking revenues and client balances rose compared with the first quarter of the year, but year-to-date the size of the overall wallet is down. Although prime broking balances are up, there is not a lot of conviction: when markets go up, balances go up, but leverage is not going up.

Historically in this kind of environment, one would see a lot of repositioning of portfolios and increasing leverage, but that has not been seen this quarter.

Société Générale (-7%, -3%): Resilient but down against a backdrop of low volumes in flow.

UBS (-9%, -9%): Cash equities down on lower activity and derivatives down versus a strong 2Q18. Financing revenues down on lower prime and equity finance revenues, on lower balances and activity. Performance in line with US peers.

Still feeling the effect of deleveraging by hedge fund clients at the end of 2018, but a good performance in electronic cash trading, where UBS thinks it has gained share.

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What they said about…ECM
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

BAML (+36%, +21%): Best year-on-year change among the peer group.

Citi (-6%, -17%): Stronger performance at the end of the quarter.

Credit Suisse (-8%, -27%): Outperformed the Street year-on-year, and good in IPOs. Equity underwriting revenue down in the markets division, particularly in EMEA. Higher revenues from ECM in investment banking and capital markets (IBCM) on higher IPOs, particularly in the tech sector, but lower volume in follow-on offerings and rights issues.

Deutsche Bank (-31%, -5%): Reduced deal volumes in core European markets.

Goldman Sachs (-1%, -5%): Backlog fell after completed deals in 2Q.

JPMorgan (-11%, -2%): Revenues down on what had been a 10-year record underwriting share last year, but a big pick-up versus 1Q after the SEC shutdown and helped by strength in tech and healthcare. Expect that it will taper off a bit in the second half.

Morgan Stanley (+1%, flat): Strength in IPOs and follow-ons. Issuers proving opportunistic and markets fertile. US market normalized after shutdown.

UBS (+23%, -37%): Higher year-on-year revenues despite 5% fall in fee pool. Private transaction revenues also up. Business was more focused on the institutional client business rather than wealth management this quarter, so less correlation with weaker inflows in wealth.

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What they said about…DCM
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

Barclays (n/a): A reduced fee pool helped take overall banking fees down a little from last year.

BNP Paribas (n/a): A strong performance, stayed top ranked for euro-denominated bonds but also now ranked eighth for all international bonds. Strong in high-yield bonds, ranked first in EMEA.

Citi (+2%, -2%): Strong performance in DCM helped offset a weaker quarter in advisory.

Credit Suisse (-18%, -20%): Revenues in markets division stable on higher investment grade offsetting lower leveraged finance, but DCM revenues lower overall in IBCM unit on lower leveraged finance and lower derivatives financing revenues.

Deutsche Bank (-24%, -22%): Leveraged finance pipeline up. Revenues for the quarter down, especially in leveraged loans and compared with a strong prior year period.

Goldman Sachs (-20%, -23%): Higher backlog. Revenues significantly down in both investment grade and leveraged finance, where there had been some big contributions last year that were not repeated this year. Performance consistent with industry trends. Lower loan volumes and lower acquisition related financings, especially with financial sponsors, but now ranked second in high yield.

JPMorgan (-13%, -7%): Probably fewer acquisition and lease financing opportunities ahead, although client dialogue remains good. Leveraged finance helped performance in the quarter. Good new issuance possibilities given the rate environment.

Morgan Stanley (-22%, -15%): Lower levels of leveraged finance activity, which is higher margin, although a pick-up in the last few weeks. Investment grade a little lower.

UBS (flat, -20%): Investment grade and leveraged finance stable. Fee pool up 2% in investment grade and down 42% in leveraged.

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What they said about…advisory
(Percentage change figures are 2Q19 vs 2Q18, then last 12 months vs prior 12 months)

Barclays (n/a): Strong performance helped to offset some of the decline caused by the lower DCM fee pool.

Citi (-36%, +18%): A strong quarter last year hurt this year’s relative performance, but DCM strength helped offset that. Better at the end of the quarter and strength in the US helps the outlook.

Credit Suisse (-34%, -5%): Down versus the Street on lower revenues from completed deals in the Americas and EMEA. Also, a strong prior-year quarter.

Deutsche Bank (-41%, -7%): Down from a strong prior-year period.

Goldman Sachs (-3%, +23%): Down on an industry-wide drop in completed M&A. Dialogue picking up around the financials sector, which has been quiet in the last few years.

JPMorgan (-16%, +6%): Grew share in announced and also announced more deals than any other firm. Outlook still healthy and companies are looking for “synergistic opportunities for growth”, but more in North America than Europe.

Morgan Stanley (-18%, -5%): Lower market volumes so revenues were down. Announced deals picked up later in the quarter. Revenues were up versus 1Q despite a fall in industry-wide completed volumes. Lots of activity in technology and healthcare. China and Asia more generally slow, but pipeline is healthy.

UBS (+60%, +7%): Very strongly up against a 26% lower global fee pool, and the quarter was UBS’s highest quarterly M&A revenues since 2012. Partly helped by deals that should have closed in 1Q slipping into 2Q. Gained share in all regions and ranked top in Asia-Pacific.

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