Price war between banks could offset benefits of volatility
A looming price war between the world’s biggest investment banks could erase the revenue rebound promised by a recent surge in market volatility, research group Coalition has warned.
Coalition’s latest benchmark industry review shows that revenue for the world’s 12 biggest investment banks fell to a nine-year low of $150.4bn last year as a persistent lack of volatility crippled their trading businesses.
Bankers, including Credit Suisse chief executive Tidjane Thiam and Morgan Stanley chief financial officer John Pruzan, have said that the resurgence of volatility in the past few weeks has helped their businesses, offering hope that 2017 was their industry’s low point.
But George Kuznetsov, head of research at Coalition, said investment banks’ overall revenue growth for 2018 might be undermined because of “intensified and increased competition” among the top banks.
“For the past three years we’ve seen many banks have been focusing more on internal restructuring, changes of management, finding the right business model,” said Mr Kuznetsov. “In 2018 for the first time I think everyone has a relatively stable business model . . . Almost every single index bank we’re working with is predicting quite extensive growth.”
To achieve that growth, Mr Kuznetsov said banks were looking at “potentially reopening” some of the businesses they downsized or scaled back in recent years. “All the cards are on the table,” he said, adding that banks see top-line growth as the only way to improve returns in an environment where capital requirements are expected to remain high.
Some are willing to compromise margins to achieve their revenue goals. “It depends on how you define margin,” he said. “If it’s undercutting someone else on price, the answer is probably going to be yes [they’ll sacrifice margin] . . . If it’s ‘do we see someone planning very aggressive hiring and as a result taking a hit to their cost/income ratio in the medium term?’ for that, the answer is probably no.”
Trading in fixed income, currencies and commodities (FICC) was banks’ weakest point in 2017. FICC revenues fell 11 per cent to $68bn, as calm markets encouraged investors to sit on the sidelines and blunted their demand for hedging. Last year’s revenues for commodities and foreign exchange for G10 currencies were the lowest since Coalition began collecting the data in 2006. The year’s markets misery was completed by a 4 per cent fall in equities revenues, which were also weak in 2016.
This year is off to a brighter start. Credit Suisse said on Wednesday that its global markets revenues were up more than 10 per cent in the first six weeks of the year versus 2017, while revenues in its Asia markets business were up 15 per cent. Hours later, Mr Pruzan told an audience in Miami that market conditions in January were “very good” for his bank’s sales and trading business, but he was cautious about the outlook.
“We can take sort of bouts of volatility, but sustained volatility is generally bad,” he said. “So what we saw last week, our businesses did really well. And what the longer-term implications are, we’ll have to see.”
Mr Kuznetsov said there was “disagreement” among banks about whether “current volatility is a one-off spike or whether volatility is here to stay”. If volatility persists, the cycle would “typically generate a very good result” for products such as trading foreign exchange, interest rates and credit contracts on behalf of clients, he said.
“The negative side is the banking product [helping clients raise debt and equity and advising on deals] is potentially going to be negatively impacted,” he said. “A lot of new issuance deals will be put on hold given the uncertainty in the market.”
Mr Pruzan and Credit Suisse’s Mr Thiam both said that they were still having good conversations with clients. “To the degree that volatility continues to spike and we see weeks and months of sort-of gappy volatility, I think that [banking] is the type of business that will be impacted. But right now, we haven’t seen that,” said Mr Pruzan. Banking revenues rose 10 per cent in 2017, to $40.6bn, Coalition’s data show.
This year also marks the first under Europe’s Mifid II investor protection regime, which imposes extra transparency on how investment banks’ services are priced and how deals are allocated. It also forces clients to explicitly pay for banks’ research instead of getting it as part of a sales and trading bundle. Mr Kuznetsov said Coalition’s analysis did not show a “drastic impact on the top-line” for investment banks. “It’s still more of an operational nightmare than a cost factor,” he said. “Cash equities might see a bit of downsizing.”
Commodities is the other area where he expects banks to pull back in 2018. “We continue to see a downfall in top-line revenues, there is no growth,” he said. “Most of the index banks are either downsizing or exiting their commodities businesses.”
Additional reporting by Ben McLannahan in New York
https://www.ft.com/content/56c65c20-122e-11e8-8cb6-b9ccc4c4dbbb
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