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Global Banking & Capital Markets Key themes from the 1Q 2016 earnings calls June 2016
Contents
1 | Revenues and profitability falter in what should have been the strongest quarter of the year
2 | Market challenges impacted trading,
investment banking and wealth management segments
3 | North American banks boost
provisions, while European banks highlight lower cost of risk
4 | Will banks accelerate expense
initiatives to offset weak revenues and drive improved ROE performance?
6 | Methodology
Top 10 themes: a year-over-year comparison
1Q 2016 1Q 2015
1 Earnings performance 1 Earnings performance
2 Macro-environment 2 Macro-environment
3 Expense trends 3 Expense trends
4 Capital 4 Capital
5 Credit quality trends 5 Regulatory and compliance
6 Regulatory and compliance 6 Lending trends
7 Lending trends 7 Cross-border activities
8 Innovation 8 Credit quality trends
9 Cross-border activities 9 Acquisitions and divestments
10 Acquisitions and divestments 10 Innovation
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |1
Main topics discussed in the 1Q 2016 earnings calls
Revenues and profitability falter in what should have been the strongest quarter of the year
“1Q 2016 was extraordinarily challenging for the global capital markets and for the industry. While there has been improvement in the last month or so, there remain a number of macroeconomic and geopolitical risks to the global markets and the global economy. As such, we would expect the revenue environment to remain challenged in 2016.”
— Marcus Schenck, CFO, Deutsche Bank
• Banks faced an extremely difficult operating environment in 1Q
2016.
• Despite macro challenges, most banks were able to maintain
strong capital and leverage ratios …
• … However, trends in profit drivers were markedly less resilient.
• Revenue weakness reflected extreme market volatility in January
and February.
• Concerns about credit quality escalated sharply, although higher
provisions were more evident at North American banks with
exposure to the oil and gas sector than in Europe.
• Expenses remained high, driven by investments in regulatory
compliance and digital initiatives.
• Returns on equity (ROE) were down at most of the banks included
in this analysis.
In 1Q 2016, positive earnings performance was elusive. Net
income was down at almost all of the banks included in this
analysis. While there were a few instances of improved results —
Macquarie Group reported record full-year earnings; Bank of New
York Mellon, BNP Paribas and Société Générale reported an
increase in quarterly earnings from 1Q 2015; and Royal Bank of
Scotland turned in a narrower net loss — the prevalent trend for
1Q 2016 was disappointing performance.
Typically, the first quarter of the year is the strongest for the
banking sector. However, in January and February 2016, banks
around the world faced stiff headwinds from a range of macro
challenges that significantly curtailed client activity levels and
impacted revenue performance. Market conditions eased
somewhat in March, but by then it was too late to reverse the
impact on 1Q 2016 profitability.
The weak start to the year does not bode well for the rest of
2016. Anxiety about global economic growth, the trajectory of oil
prices and geopolitical issues remain firmly in place, clouding the
revenue outlook for the year and raising questions about whether
banks should be doing more to cut costs and reposition their
businesses. Notably, management at many banks did not appear
to be optimistic about near-term prospects:
• Bill Winters, Group Chief Executive, Standard Chartered: “Is the
economic environment going to stay as relatively benign as it has
been for the past month or is it going to look more like January and
February? We don't know.”
• David Mathers, CFO, Credit Suisse: “This is a very challenging macro
environment. Some of the conditions that obviously resulted in 4Q
2015 being difficult and 1Q 2016 being difficult could easily recur in
the balance of this year. There are still the same macro effects that
we saw in the first quarter. So just be cautious.”
Return on average equity, 1Q15 vs. 1Q16
Source: SNL Financial; *Data for ING is Return on Average Common Equity (ROACE)
See acronyms key at the back page
(1.6
)
1.4
2.2
2.5
2.5
2.7
3.7
3.8
4.2
4.4
5.0
5.2
6.0
6.4
6.5
6.8
6.9
7.1
7.6
7.8
9.0
9.1
9.2
10
.4
11
.8
13
.0
13
.3
15
.3
18
.1
19
.9
24
.8
NO
M DB
CA
CB
K
RB
S
CS
UC
G
BA
C
BA
RC
LL
D
UB
S
GS
MS C SG
ST
T
INT
BB
VA
BN
P
SA
NT
JP
M
HS
BC
BK
ING
*
WF
C
US
B
TD
RB
C
CIB
C
ITA
U
AX
P
Return on average equity (ROAE)
1Q16 1Q15
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |2
Market challenges impacted trading, investment banking and wealth management segments
“Markets were challenging, equity issuance was effectively non-existent and retail activity was extremely subdued, reflecting the many uncertainties with which investors grappled.”
— James Gorman, CEO, Morgan Stanley
As expected, trading revenues tumbled when compared to the first quarter of 2015. The steep decline was partially due to the fact that last year’s first quarter performance benefited considerably from the Swiss National Bank’s move to decouple the Swiss franc from the euro. The bigger problem, however, was the extreme market volatility driven by macroeconomic uncertainties in the first two months of 2016. Trading woes were exacerbated by a drop in investment banking revenues, as companies delayed IPOs, equity issuance and M&A plans amid the market turbulence.
Weakness was also evident in banks’ wealth management
operations, which normally help to offset more volatile performance
in wholesale segments. Many banks reported lower transaction and
incentive fees as clients fled to the sidelines.
• UBS reported “the lowest level of transaction volumes recorded
for a first quarter.”
• At Citigroup, CFO John Gerspach noted: “The first quarter is
historically a strong period for wealth management in Asia, with
higher transaction activity driving strong investment sales
revenues. Given weak investor sentiment during the quarter, we
didn’t see the typical rebound in transaction activity, and
therefore, our wealth management revenues declined
significantly from last year.”
• Goldman Sachs CFO Harvey Schwartz said 1Q 2016 was “the
first quarter in a while that we faced significant headwinds
across each of our business segments.”
• Deutsche Bank’s wealth management revenues were down 8%
from 1Q 2015. CFO Marcus Schenk said: “The decline versus the
first quarter 2015 was driven by lower performance and
transaction fees as a result of the current market environment,
with lower client activity.”
Percentage change in Fixed Income, Currencies and Commodities (FICC) and Equities trading revenues from 1Q 2015
Source: Company reports
See acronyms key at the back page
(82)%(76)%
(56)%(47)%
(33)% (29)%(23)%
(14)% (13)% (11)%
2% 2%
17%
(29)%
(1)%(10)%
(23)% (20)% (29)%
(41)%(34)%
(5)%
(19)%(13)% (9)%
(37)%
CS NOM MS GS UBS DB BNP HSBC JPM C BARC BAC SG
FICC Equities
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |3
North American banks boost provisions, while European banks highlight lower cost of risk
“The cost of risk stands at 46 basis points versus 64 basis points in 4Q 2015. … From a historical point of view, you have to go back before the beginning of the financial crisis to find such a low level of cost of risk.”
— Philippe Heim, Group CFO, Société Générale
During the 1Q 2016 earnings season, management at banks across
regions highlighted a continuation of positive trends in overall credit
quality. Lower non-performing loan (NPL) ratios, higher coverage
ratios, a drop in new impairments and lower cost of risk in Europe all
point to a normalization in the credit cycle and more rigorous
underwriting standards.
Despite this, analysts appeared to be worried about the adequacy of
banks’ provisions amid lower commodity prices and slower global
economic growth. As a result, credit quality emerged as the single
most dominant topic discussed in earnings calls around the world.
Of particular concern was banks’ exposure to energy borrowers in
North America. Many banks have been forced to build reserves
against oil and gas portfolios faster than anticipated as falling oil prices
have put energy borrowers under considerable stress. Not only has
this raised concerns about the potential for a new credit crisis, it is
also taking place in a low revenue growth environment, essentially
amounting to a one-two punch on bank profitability.
Other portfolios that are being carefully monitored include shipping;
metals and mining; New Zealand dairy; and selected economies such as
Brazil, Indonesia and Russia.
Management acknowledged that there are pockets of stress that they
are closely monitoring for further deterioration, but defended the
strength of their provisioning. In contrast to their cautious stance on
revenue prospects, many provided an optimistic outlook for overall
credit quality trends.
• John Stumpf, CEO, Wells Fargo: “While deterioration in the oil and
gas portfolio drove a $200 million reserve build, the rest of our
loan portfolio continued to have strong credit results.”
• Marcus Schenck, CFO, Deutsche Bank: “Loan loss provisions
increased by €87 million in the quarter, reflecting specific events
in a few portfolios. Overall, the outlook for our credit portfolio
remains relatively benign.”
• Gary Lennon, Group Executive, Finance, National Australia Bank:
“After several periods of declining new impaired assets, we’ve
seen an uptick in the first half 2016 to AU$1.3 billion with the bulk
explained by two key impacts; AU$522 million relating to the New
Zealand dairy exposures and AU$358 million relating to the four
large single names exposures which have specific provision
coverage of circa 50%. Collective provisions (CP) coverage to
credit risk weighted assets remains peer leading and is broadly stable at 0.98%. As I dig into a couple of areas of interest around asset quality, the resources sector is facing some challenges and we are alert to this. But overall we remain comfortable with our position.”
Percentage change in provisions for credit losses or cost of risk from 1Q 2015
Source: Company reports
See acronyms key at the back page
(39)%
(27)%
(23)%
(21)%
(19)%
(15)%
(10)%
(6)%
(6)%
(6)%
7%
15%
25%
30%
31%
39%
40%
52%
77%
79%
90%
104%
ING
BNP
UCG
BBVA
CA
SG
INT
CBK
SANT
LLD
C
BARC
USB
BAC
ITAU
DB
CIBC
RBC
TD
WFC
JPM
HSBC
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |4
Will banks accelerate expense initiatives to offset weak revenues and drive improved ROE performance?
“There is no magic bullet that can fully offset material revenue headwinds without compromising sustainable profitability or, in fact, the future of our franchise. Therefore, we will continue to carefully balance our investments in structural growth with tactical adjustments to our cost base to mitigate the cyclical headwinds we are facing.”
— Sergio Ermotti, Group CEO, UBS
In 1Q 2016, 23 of the banks included in this analysis reported a
decline in expenses from the year-earlier period, which would appear
to indicate that most are making progress on expense management.
However, of the banks that cut costs, only eight actually achieved
positive operating leverage. In an environment where revenue
prospects are muted at best, one of the primary levers for boosting
profitability and ROE is to keep the rate of expense growth well below
revenue growth.
But, even with the lack of success on this front in 1Q 2016, only a
few banks appeared to be willing to adjust the pace of reductions or
take additional measures to improve efficiency. Nomura launched a
strategic review of its businesses in EMEIA and the Americas, Lloyds
Banking Group accelerated its cost plans and Deutsche Bank is
“looking into potentially accelerating some of the cost measures that
we have planned until the year 2018 as a reaction to what we’re now
seeing in the market.” At Société Générale, Group CFO Philippe Heim
announced a plan intended to deliver €220 million in additional cost
cuts in Global Banking and Investor Solutions (GBIS).
The more common response to questions about what more could be
done on costs in the ongoing low growth environment was to take an
incremental approach to savings. Management appeared unwilling to
launch new drastic expense reduction measures to counter what they
view as cyclical revenue weakness. At some banks, there even seemed
to be a reluctance to fine-tune their current approach to expense
management. Many cited regulatory compliance costs and ongoing —
and necessary — investments in innovation as a barrier to efficiency
improvements.
• At U.S. Bancorp, the efficiency ratio has risen almost 300 basis points in the past three years. Nevertheless, CEO Richard Davis is reluctant to cut investments: “Nothing has gone in our industry’s favor in the last five years. … But we are [not going to] a 52% efficiency ratio by suffocating the company and not investing and then having to explain two years from now why we didn’t invest.”
• HSBC Group Finance Director Iain Mackay noted that “two bad months at the beginning of 2016 aren’t really the basis on which we’d make a decision that affects the long-term future of the Group.”
• Goldman Sachs CFO Harvey Schwartz said non-compensation costs
were at “the lowest quarterly level since 2Q 2009.” However,
revenues were at a four-year low, offsetting any earnings tailwind
lower costs might have provided.
The operating backdrop that characterized 1Q 2016 was clearly
much tougher than the markets and banks had anticipated. And
while the near-term outlook has improved slightly, analysts and
banks alike remain cautious about prospects for the remainder of the
year. At the same time, management at global banks do not expect
the 1Q 2016 environment to represent the new normal for the
industry, and as such, most appear to be willing to wait out the cycle
instead of tackling structural cost issues more aggressively.
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |5
Percentage change in revenues and expenses from 1Q 2015
Source: Company reports; banks inside yellow circle with yellow markers had positive operating leverage (revenues grew at a higher rate than expenses)
See acronyms key at the back page
AXP
BAC
BARC
BBVA
BNPBK
C CA
CBK
CIBC
CS
DB
GS
HSBCING
INT
ITAU
JPM
LLD
MS
NOM
RBC
RBS
SANT
SG
STAN
STT
TD
UBS
UCG
USB
WFC
(45)%
(35)%
(25)%
(15)%
(5)%
5%
15%
(40)% (30)% (20)% (10)% 0% 10% 20% 30%
Re
ve
nu
e g
row
th
Expense growth
HIgher revenues; higher expenses
HIgher revenues; lower expenses
Lower revenues; lower expenses
Lower revenues; higher expenses
Global Banking & Capital Markets – key themes from the 1Q 2016 earnings calls |6
Methodology The purpose of this review is to examine the key themes discussed among 35 global institutions operating within the banking and capital markets (BCM) sector during the 1Q 2016 earnings reporting season.
Acronym key
ANZ — Australia and New Zealand Banking Group
AXP — American Express Company
BAC — Bank of America
BARC — Barclays
BBVA — Grupo BBVA
BK — Bank of New York Melon
BNP — BNP Paribas
C — Citigroup
CA — Crédit Agricole
CBK — Commerzbank
CIBC — Canadian Imperial Bank of Commerce
CS — Credit Suisse
DB — Deutsche Bank
GS — Goldman Sachs
HSBC — HSBC Holdings
ING — ING Groep
INT — Intesa Sanpaolo
ITAU — Banco Itaú
JPM — JPMorgan Chase
LLD — Lloyds Banking Group
MAC — Macquarie Group
MS — Morgan Stanley
NAB — National Australia Bank
NOM — Nomura Holdings
RBC — Royal Bank of Canada
RBS — Royal Bank of Scotland
SANT — Banco Santander
SG — Société Générale
STAN — Standard Chartered
STT — State Street
TD — Toronto-Dominion
UBS — UBS Group
UCG — Unicredit Group
USB — U.S. Bancorp
WFC — Wells Fargo
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1605-1930868 ED None
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