What they said about CIB in Q3 ’19: a guide to bank results

Investment bank quarterly heatmaps

numbers are percentage change figures for Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18

---

What they said about…CIB
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (+6%, flat): Quarterly investment banking fees, excluding self-led transactions, were up 27% on a strong debt capital markets and advisory performance. The bank said it gained 80 basis points of market share, to 6.5%, as measured by Dealogic.

BofA’s Moynihan: still pushing into the mid-market

The client base is being broadened, with middle-market investment bank expansion continuing and chief executive Brian Moynihan citing it as one of the drivers of the improvement in market share. He wants to bring the bank’s investment banking capabilities “to our great commercial banking franchise in the United States”.

Barclays (+17%, +4%): Chief executive Jes Staley liked the strong performance in both the markets and banking businesses, with banking fees up 33% and markets revenues up 13%, which he noted was in line with US peers.

But while he thought the bank was doing “reasonably well” in FICC, he thought it could do better in equities. One option he rules out is a withdrawal along the lines of Deutsche Bank: to be a bulge-bracket investment bank in the two deepest capital markets in the world – Europe and the US – he says: “You have to be across all asset classes, which includes equities”.

The improvement in banking fees was actually better than peers. Advisory and DCM had helped to drive the performance in banking, and the result was the third-best third quarter for that unit.

BNP Paribas (+12%, +6%): Revenues up in all businesses as the bank continues its push to expand in selected areas while also investing in technology to reduce costs through what it calls industrialization. A binding agreement was signed in September on the acquisition of Deutsche Bank’s electronic equities execution and prime finance business, a business that BNPP expects to run with a 20% return on equity as it benefits from substantially lower cost of funding than its previous owner.

The bank’s new capital markets platform, which is intended to improve its ability to originate-to-distribute, is bearing fruit. It said that it had led to good development of business in Europe.

Citi (+3%, flat): All units up apart from ECM and equities. Banking revenues rose 5% and markets by 1%, but the bank expects the low-rate environment to hit revenues in the near term. DCM and advisory revenues are offsetting weakness in ECM for the moment, and the overall 4% rise in investment banking businesses was better than the industry wallet.

Citi’s Corbat: treasury and trade solutions is the driver

Chief executive Mike Corbat highlighted the 7% growth in the bank’s treasury and trade solutions business as a driver of the CIB’s overall performance, although there had been share gains in investment banking and “resilience” in the markets businesses.

Citi does not expect a repeat of the tough fourth quarter for trading that was seen in 2018.

Credit Suisse (+11%, -2%): The third quarter is typically a weak one for the bank, but the focus continues to be firmly on being a wealth manager with investment banking capabilities. The overall quarterly improvement was mostly attributable to a 66% jump in fixed income sales and trading as the bank’s underwriting and advisory revenues fell 18%, and equities sales and trading was up only 4% (although that was better than most).

Chief executive Tidjane Thiam noted that there had been a slowdown in Asian capital markets and M&A activity, especially in Greater China, where he said the quarterly fee pool had been one of the worst in the last five years. It had been “overall not a particularly supportive environment”.

Thiam stressed that the firm’s investment banking and capital markets franchise remained core to its strategy, bringing many benefits to its divisions that are “not always reflected in its P&L”.

Credit Suisse’s Thiam: Q3 unsatisfactory

He was pleased with three years of growth since the strategic shift in 2015, and thinks it is a fundamentally good franchise, but said that the third quarter’s performance had been “unsatisfactory”.

The bank has suffered from a downturn in M&A and IPOs, but Thiam said that the pipeline would lead to improvement. He has wanted for some time to strengthen Credit Suisse’s capabilities in healthcare and technology, where the fee pools are big and growing, and he thought that some hires in 2019 were having an effect there as the bank was increasing share.

On the sales and trading side, the bank is pinning a lot of its strategy on its international trading solutions (ITS) venture, which is a collaboration effort between global markets and wealth management and which Thiam thinks is a differentiator for the bank. ITS revenues rose 43% year on year.

He, like Deutsche Bank chief executive Christian Sewing, thinks primary and secondary markets have bifurcated, with the result that Credit Suisse’s strong global markets result has been able to offset a poor quarter for primary activity.

Deutsche Bank (-3%, -10%): Another quarter dominated by the bank’s new restructuring plan, which is seeing it exit the equities sales and trading business and offload its electronic execution and prime finance businesses to BNP Paribas. It has also split its corporate banking businesses from its investment bank.

Deutsche Bank’s Sewing: transformation on track

Chief executive Christian Sewing said that the transformation was on track, and welcomed the fact that all four core businesses within the bank had been profitable. Within the investment bank, origination and advisory revenues rose 20% year on year, which was much better than a flat fee pool.

All told, he thought the result was “satisfactory”, given the circumstances, and the impact of the restructuring had been as expected. Debt origination and advisory had also outperformed. ABS and commercial real estate saw strong activity.

Goldman Sachs (-2%, -7%): Quarterly revenues fell year on year in underwriting and advisory, but the markets division saw revenues rise. Chief executive David Solomon will unveil the firm’s long-awaited strategic update at its first investor day on January 29, 2020.

Financing markets were seen as generally attractive, sponsors active and equity valuations high. The debt underwriting and advisory backlog is up from the second quarter.

The Investing & Lending division saw record debt securities and loans revenue but a 40% year-on-year fall in equity gains in the private equity portfolio (including a markdown of its WeWork position). And the firm saw $267 million of net losses in its public equity portfolio, which was hurt by positions in Uber, Avantor and Tradeweb.

HSBC (-16%, -11%): A performance that reflected low levels of client activity in the global markets business, according to the bank. Asia was a bright spot, growing by 9% and accounting for more than half of the division’s adjusted revenue.

HSBC’s Quinn: bank needs to accelerate plans

Overall the performance was described as not acceptable by interim chief executive Noel Quinn, in his first quarterly results call, and he said that the bank would accelerate plans to remodel some areas, including in continental Europe and the US, where returns needed to be improved. There will be a “material” reduction in risk-weighted assets in the US, for example, while Asia and the Middle East could see an increase. The restructuring work may take two years.

Global banking revenue actually grew as the bank increased lending balances and gained from wider credit spreads on portfolio hedges, but these gains were partly offset by lower event-driven revenue.

JPMorgan (+6%, -1%): A 9% share of global investment banking fees put the bank in top position, with record third-quarter revenues in a market that was down. This quarter’s performance was partly driven by record growth in the bank’s mid-market business, but also by a very strong result in fixed income sales and trading.

Record fees within investment banking, where a strong equity and debt capital markets performance – driven by the bank’s credentials in technology and healthcare – was offset a little by a weaker quarter for advisory. The bank saw no signs of a broad deterioration in the wholesale markets. Pipelines are healthy and driven by the US.

Morgan Stanley (+2%, -8%): Institutional securities division revenues of $5 billion were the highest third quarter in 10 years, with a particularly strong September. CFO Jonathan Pruzan saw opportunities to increase share in Asia in future.

The firm saw strength across products driven by strong client engagement despite market volatility, which chief executive James Gorman put down to its “resilient mix”. But institutional securities division profits fell on rising expenses, including continued spending on technology.

Societe Generale (-8%, -4%): Pleasing progress with the bank’s restructuring plan for its global banking and investor solutions business. Structured financing revenues up, although closure of some activities led to overall decline in global markets revenues.

SG’s Oudéa: restructuring ahead of targets

Chief executive Frédéric Oudéa said that the results were in line with objectives and resilient in an unfavourable environment. He said the business was still not benefiting from the positive effects of the restructuring, although that was ahead of its 2020 targets.

Specifically, the bank has already hit its target of cutting €10 billion of risk-weighted assets from the division by 2020, with €20 billion cut in the year to date. Redundancies are under way. The bank has closed its OTC commodities business and its proprietary trading subsidiary.

UBS (-10%, -14%): One of the biggest fallers in investment bank revenue terms, and the only firm in the peer group to report year-on-year revenue falls in each of ECM, DCM, advisory, FICC and equities – although there were pockets of gains, such as investment grade DCM. Its biggest problem was that it underperformed substantially in the US market, the biggest fee pool.

Chief executive Sergio Ermotti said the investment bank had suffered because of its geographic and product footprints – the first more weighted to Europe and Asia than many rivals, and the second less weighted to rates, credit and DCM.

UBS’s Ermotti: not satisfied with performance

But he was also “not satisfied” with the performance. He promised a number of actions to enable it to serve clients better and capture growth opportunities, including improving the collaboration between wealth management and the investment bank in the US middle market and between the investment bank and the corporate segment in Switzerland.

There is also a reorganization of the investment bank division on the cards in January 2020 that will see UBS adopt more conventional global banking and global markets nomenclature for its corporate client solutions and investor client services units, creating five industry segments within global banking and three product areas within global markets. The rejig will incur about $100 million of restructuring costs in Q4 ‘19.

But it is also intended to deliver $90 million of net cost savings, with the gross savings higher than that and almost entirely down to reduced personnel costs. And there’s no plan to reduce the capital commitment to the investment bank, which will remain targeted at one third of the group.

---

What they said about…FICC
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (flat, -5%): An improvement in mortgage and municipal products was mostly offset by weaker trading in FX and credit products.

Barclays (+19%, +15%): Result was helped by strength in rates and securitized products.

BNP Paribas (+35%, +24%): Performance boosted by the fact that much of primary DCM sits within BNPP’s FICC business line. Credit rose sharply, rates was good and there had been a rebound in FC and emerging markets.

Citi (flat, +3%): A mixed picture geographically, as a fall in North America was offset by a rise everywhere else. Corporate and investor client activity rose in rates and flow products. G10 rates revenues increased, helped by North America. Spread product revenues fell as higher flow activity was overshadowed by a tough environment for structured products, particularly in North America.

Credit Suisse (+66%, +19%): There was revenue growth across most businesses with “significantly” higher client activity. Securitized product revenues were up on higher agency trading activity from favourable market conditions, including rate volatility and investor demand for yield products. The asset finance business saw robust activity.

Global credit was up a lot, driven by higher investment-grade activity and stable leveraged finance. Emerging markets revenues were up on structured credit and financing activity, but rates trading fell. Asia Pacific saw revenues fall sharply, driven by credit and structured products.

“We think that having a sales and trading capability in Asia is a core part of the strategy long term”

Tidjane Thiam, Credit Suisse

It took the Asian markets unit to a loss, although it is a small business compared with non-Asia, and it also doesn’t report revenues from referrals of Asian clients to other units. But it’s one that chief executive Tidjane Thiam thinks is still core to the firm’s Asian long-term strategy. He said that conditions had been very difficult, but that there was a lot of work going on to improve the performance.

The bank has created an Asian version of the ITS collaboration effort with wealth management – the first transaction was in the third quarter – and is also looking at how to improve its offering in Asian prime services now that it has successfully done so in its global business. Thiam also hopes that the firm will be able to capture market share in Asian securitized products as the business grows.

Deutsche Bank (-13%, -8%): Better client activity drove an increase in financing revenues. FX was down a bit, although corporate flows helped to offset part of the falls that resulted from continuing low market volatility. Rates and emerging markets were down a lot, partly reflecting some risk-management losses.

Distressed debt-trading revenues fell compared with the previous quarter, which were strong. The rates decline was partly down to the restructuring of the bank, but also a specific loss of €37 million that was related to one unnamed investment. There were weaknesses in the governance set-up, according to chief executive Christian Sewing, which were addressed through changes in July and August.

Emerging markets weakness was due to Latin America, and Argentina in particular. But performance was improving and the bank remains committed to a broad-based emerging-markets rates franchise.

Goldman Sachs (+8%, -7%): Quarterly revenues were up in commodities, credit, mortgages and rates, but fell in currencies. Rates benefited from increased hedging flows amid a rally in government securities, although challenging conditions also offset much of the gains. Commodities revenues were boosted by oil-price volatility in September. Currencies were down on geopolitical worries, especially in emerging markets.

Client activity was described as solid in a mixed environment. Global diversification drove a broad improvement in the firm’s business. Efforts are continuing on electronification, workflow automation and improvement of straight-through processing. Automation is bearing particular fruit in credit, with the firm reporting it had executed sizeable trades in investment grade.

HSBC (-24%, -16%): Reduced client activity because of economic uncertainty, and off a strong third quarter in 2018.

JPMorgan (+25%, +1%): A good result but also off a poor quarter in the previous year, when conditions had been worse. This time it was strong across the board, with better flows in rates, commodities and agency mortgage trading.

Morgan Stanley (+21%, -4%): The rise in quarterly fixed-income revenues drove an overall sales and trading rise of 10%, as equities fell 1%. The FICC result was driven by strong client activity in credit and rates, although FX was weaker. The FICC business is sized for a $1 billion quarterly run-rate, but has already posted $4.2 billion this year.

Corporate credit and securitized products were particularly strong in the quarter, and balance-sheet velocity up from last year. Macro was challenging, especially in the first half of the quarter, but structured products and commodities were up, the latter driven by North America power and gas and by gains from counterparty risk management.

Societe Generale (+1%, -9%): Rates, credit and financing all saw good results, helping to offset the effects of the restructuring of the business.

UBS (-1%, -6%): The best of the firm’s investment bank business lines in terms of quarterly year-on-year change, and the bank said it was a decent performance, given low levels of volatility. The US banks might have all reported falls in FX, but at UBS it was up 2% (off a strong prior-year) on August volatility. Credit revenues fell, and more than offset increases in rates.

---

What they said about…Equities
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (+13%, -10%): The year-on-year third-quarter increase was driven by growth in client financing activity, which the bank says it is continuing to invest in. It has added new clients this year and increased share with existing ones.

Barclays (+5%, -11%): A lower result in derivatives wasn’t enough to stop an overall increase for equities. But chief executive Jes Staley would like to do better in this business and noted that there was always the possibility of another poor quarter across the industry, like in the fourth quarter of 2018.

Dialogue with buy-side clients was good and there had been gains in prime services. Overall a firm commitment to the equities business, which Staley thinks is essential to be a top investment bank. He says Barclays is well able to compete with the US firms in equities, “so we’re going to stay fully invested in that business”.

BNP Paribas (-15%, -20%): A poor environment for the flow business was partly offset by increased volumes in structured product issuance and a slight growth in prime. BNPP suffers a little in its reporting compared with peers as its brokerage business sits within Exane BNP Paribas, which is not consolidated.

Citi (-4%, -13%): Prime finance in all regions was the main faller here, although it was mitigated somewhat by better results in equity derivatives on better volatility and resulting client activity. Cash was flat.

Unlike David Solomon at Goldman Sachs, Citi chief executive Mike Corbat doesn’t rule out the possibility of cash equities commissions falling to zero in line with what has happened in the retail business, but “I don’t think we’re right there”.

Credit Suisse (+4%, +2%): A story of two regions: in Asia, revenues fell 10% as derivatives, prime and cash all suffered, but the non-Asia business was up 13%.

Ex-Asia, equity derivatives and prime services rose, but were partly offset by lower cash. Derivatives was driven by higher flow and corporate derivatives trading, particularly in EMEA. Prime was up on increased balances and volatility. Cash fell as lower primary activity was reflected in secondary trading.

“We’re going to stay fully invested in [the equities] business”

Jes Staley, Barclays

Goldman Sachs (+5%, -6%): Better client activity led to higher commissions and fees, and better spreads meant higher revenues in securities services. Cash equity market volumes were mixed, with higher volumes in the US but lower in Europe. Cash revenues were well up but offset by a fall in derivatives. Client activity overall was seen lower than in the second quarter of the year.

Solomon’s view is that institutional cash equities is unlikely to see a move to zero commissions like the retail sector since the business involves financing as well as execution. But to the extent that there is more pressure on commissions, it will be reflected in yet more wallet-share concentration to those firms that have global scale and the ability to deploy balance sheet.

HSBC (-28%, -18%): No additional commentary.

JPMorgan (-5%, -11%): Weaker than a strong period in the prior year, with cash performing better but derivatives challenged amid lower client activity and worse market conditions.

Morgan Stanley (-1%, -13%): Lower revenues in derivatives were down to less favourable inventory management, but were partly offset by higher client activity, and there was a “solid” performance across all other businesses. The firm expects to remain the market leader this year. Cash saw a slight decline from the second quarter of the year.

Overall performance was helped by a combination of scale and technology, coupled with rivals stepping back from the business. Also helping Morgan Stanley is the fact that prime services is the biggest part of the firm’s franchise, “the centre of the machine”.

Societe Generale (-20%, -9%): The business was hit by lower volumes and poor markets, particularly in August.

UBS (-7%, -13%): A more challenging environment and lower client activity combined with a strong prior-year to make Q3 ‘19 look bad (but not as bad as some). Cash was roughly flat, but derivatives dropped 30%, which hurts UBS more than many because of its bigger structured franchise.

Conditions were also tougher in Asia, where it is heavily weighted, but the bank said it thought it had gained share in cash in Asia and the US. Lower prime balances and margin compression meant financing revenues fell a little.

---

What they said about…ECM
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (flat, +3%): No additional commentary.

Citi (-5%, -10%): Market share fell in the quarter, but is up year to date.

Credit Suisse (-24%, -24%): Lower levels of IPOs and follow-ons caused by increased market volatility hurt revenues globally.

Deutsche Bank (-8%, -41%): A business that will be closely watched externally as Deutsche attempts to continue what it describes as a “focused” ECM offering despite ditching its secondary equities franchise. It was by no means the worst faller on a year-on-year basis, but it has been shrinking consistently for years.

Nonetheless, pricing 27 deals and with a further 28 in the pipeline since the announcement of the restructuring in July indicated to management that there was plenty of promise for the slimmed-down business.

Goldman Sachs (-11%, -15%): The bank said it ranked top in equity and equity-related offerings. The year-on-year fall in revenues reflected a big decline in industry-wide IPOs. Management is confident that markets will continue to invest in disruptive stories, even though CFO Stephen Scherr noted that “recent market reception to certain companies has been less favourable”.

“Recent market reception to certain companies has been less favourable”

Stephen Scherr, Goldman Sachs

Chief executive David Solomon said that the IPO process was alive and well in the US, and that globally he expected a rebalancing of the process of private capital formation and the time that companies wait to come to market.

JPMorgan (+22%, -4%): The best year-on-year increase among global peers, and the bank said it saw wallet-share gains in IPOs and convertible bonds, in markets that were receptive. It expected the fourth quarter to be down on a sequential and on a year-on-year basis, but the pipeline was healthy nonetheless.

Morgan Stanley (-9%, -8%): Lower volumes of IPOs and follow-on offerings were partly offset by an increase in convertible bond issuance.

UBS (-22%, -26%): Lower revenues from public offerings in all regions despite a 4% increase in the fee pool. Private transaction revenue was stable.

---

What they said about…DCM
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (+19%, -3%): Strong performance that was able to take advantage of several weeks of record debt issuance.

Citi (+7%, +8%): The bank’s share of wallet increased, a trend that was seen particularly in investment-grade underwriting.

Credit Suisse (-7%, -18%): Lower revenues from ultra-high net-worth business, derivatives financing and leveraged finance. But there was good momentum in investment-grade underwriting.

Deutsche Bank (+13%, -9%): Strength in high yield and leveraged loans helped offset the weakness in ECM.

Goldman Sachs (-7%, -15%): The fall in revenues was largely down to a decrease in leveraged finance transactions, which are more of a focus at Goldman’s DCM business than for some rivals, who were able to benefit from strong investment-grade issuance.

JPMorgan (+17%, +7%): Up in a market that was down overall, with the bank’s investment-grade activity up, as well as participation in large acquisition financings.

Morgan Stanley (+15%, -10%): Record quarterly revenues for the firm, spread across investment grade and high yield. Particular strength in the Americas. A good rate environment for issuers unlocked the summer backlog. Its 14% market share for the quarter was the best for many years.

UBS (-15%, -22%): The overall fall concealed two contrasting stories, with the bank’s investment-grade revenues rising 37%, well above the fee-pool jump of 17%, but leveraged-finance revenues plummeting 45% from a strong base last year, compared with a fee-pool drop of 18%.

---

What they said about…Advisory
(Percentage change figures are Q3 ’19 vs Q3 ’18, then YTD ’19 vs YTD ’18)

Bank of America (+73%, +26%): Particularly strong, and the biggest year-on-year rise of any investment banking business among the peer group. The bank advised on five of the top 10 transactions completed in the quarter.

Citi (+5%, +6%): The rise in advisory helped to offset a weaker quarter in ECM and, encouragingly for the bank, was driven by its business in the EMEA region.

Credit Suisse (-30%, -32%): The worst year-on-year faller in the peer group. CFO David Mathers said that delays in completions in the bank’s M&A pipeline had led to loss of share.  

Deutsche Bank (+57%, +4%): The best-performing business within Deutsche’s investment bank on a year-on-year basis, and one that was driven by the Americas, healthcare and industrials. There were also some closings that had been expected not to come until the fourth quarter.

Goldman Sachs (-22%, +3%): The year-on-year fall was due to a strong quarter last year, with lower completed M&A volumes this year. It was consistent with a 20% industry-wide fall in the number of transactions over $500 million, which are an important driver of Goldman’s revenues.

The firm still ranks number one in global announced and completed M&A, and was on eight of the 10 largest deals closed in the quarter. So far this year it has announced $1.1 trillion of deals and closed $1 trillion. The natural resources and healthcare sectors were cited as particular drivers of client dialogue.

JPMorgan (-13%, -6%): Lower deal activity compared with a strong prior-year period, but the bank said its share increased.

Morgan Stanley (+8%, -14%): Completed transaction volumes increased, driven by a number of large strategic deals, although this was slightly offset by lower fees. Pipelines healthy.

UBS (-21%, -6%): The bank said that the global fee pool had fallen 10% year on year, and it had seen a strong result in the prior-year period.