Alternate title: the market isn’t entirely nuts, when’s the crash?
While tech titans and buyers of initial public offerings dream of a wondrous future, bank investors appear to be saying something very different.
Here’s the FT’s Tom Braithwaite and co, recently foreshadowing the US bank earnings season:
Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month.
Midnight Madness, that Goldman Sachs-led all-night lavish scavenger hunt/puzzle-solving competition/performance art so wonderfully described by Quartz earlier this year, is back and expanding. This year the charitable event will include Citigroup, Credit Suisse, BlueMountain, and Secor Asset Management all fielding teams to compete against Goldman.
Below you can see the pitchbook that was sent to potential participants (in typical banking style) earlier this year: Read more
“I’d like to be instrumental in the manipulation of key interest rate benchmarks to the benefit of my employer”, said no aspiring financier ever. Equally unimaginable are freshly-minted bankers starting out wide-eyed, bushy-tailed and eager to aggressively mark books in order to disguise losses.
And yet, here we are with a plethora of scandals and misdeeds.
Why do so many in the industry lose their way? Read more
Amidst a general fiscal-fudge-relief-rally on Wednesday, one sector stood out…
Goldman’s Q3 is out, and it’s raised the roof in trading / the dividend:
The Board of Directors of Group Inc. increased the firm’s quarterly dividend to $0.50 per common share from $0.46 per common share…
As the FT reports, total net revenues doubled, to $8.35bn, and it’s a marked changed from the third quarter last year.
Although, does this count for something? — 1 per cent quarterly growth in FICC: Read more
Arguably THE banking factoid of the year, by way of Espirito Santo’s review of Thursday’s Deutsche Bank conference call (see bold):
The conference call provided the first clear indication from management that reduced capital allocated to trading operations is impacting trading revenues in the IB. This has been a strong theme that we have highlighted to clients, which first arose as a concern in 4Q11. Read more
For Thanksgiving, or just to cheer you up after the latest market gloom, we’ve made a game out of Tricumen’s report on investment banking.
Here’s how it goes: the below chart shows the average quarterly revenue derived from different investment banking
silos segments, after writedowns. Read more
Citigroup, JP Morgan Chase, BNP Paribas, Royal Bank of Scotland and HSBC could face the steepest capital surcharges of 2.5 percentage points, in provisional plans drawn up by global regulators, Bloomberg reported. The list has been fleshed out as part of G20 plans to force banks to boost their reserves above minimum levels previously agreed by international regulators in a bid to further reduce systemic risks. Bank of America, Barclays and Deutsche Bank might face surcharges of 2 percentage points, Bloomberg said, citing a confidential draft of the plan. A simplified version of the plan of global systemically important financial institutions, which did not include surcharge plans for individual banks, was published on Friday 4 after the conclusion of the G20 meeting by the Financial Stability Board, FT Alphaville reported.
Wall Street Bonuses are set to fall by an average 20 to 30 per cent this year, making it the weakest bonus season since the credit crunch, underscoring the malaise in the industry, the New York Times’ Dealbook reported, citing a survey from Johnson Associates, a boutique compensation consulting firm. Employees in trading and investment banking divisions will see their pay cut proportionately more than asset managers and commercial bankers whose compensation package will equate to 2010 levels. The year-end bonus typically represents the bulk of financial employees pay and banks tend to allocate as much as 60 per cent of their annual revenue in compensation. In the first nine months of the year, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup combined allocated almost $93bn to compensate employees, up from $91.25bn, NYT said, citing figures from the survey. However, the final compensation figure is not set until the fourth quarter when firms can take stock of their annual revenue.
Société Générale, France’s second largest bank by market cap, reported a 31 per cent slump in third-quarter net profit on Tuesday, as higher provisions against Greek sovereign bonds and testy financial conditions blighted its corporate and investment banking division, the Wall Street Journal reported. Net profit for the quarter that ended September 30 came in at €622m ($856.93m), below market expectations, as it wrote down its Greek sovereign debt exposure by 60 per cent, higher than the 50 per cent haircut outlined by the EU. The bank’s Tier 1 ratio was 9.5 per cent at the end of the third quarter. SocGen said it would not propose a dividend for 2011 in order to bloster the group’s capital position.
Investment banking fees from mergers and acquisitions and capital raising have slumped in the third quarter to lows not seen since the aftermath of the Lehman Brothers collapse, the FT reports. Investment banking fees – about 15 per cent of overall investment banking revenues – fell 43 per cent from the second quarter, according to data by Thomson Reuters and Freeman Consulting. Though up 5 per cent to $57.6bn so far this year compared with 2010, full-year fees could fall 2.7 per cent if the current rate was maintained, Thomson said. Global M&A volumes were down 14.3 per cent from the second quarter, with $481.2bn worth of deals announced. Advisers expect M&A for the year may be only single digits higher than 2010, or even flat, despite growth of 19.9 per cent in the first three quarters.
US investment banks are facing losses on financing commitments for buy-outs and other deals struck before the recent market turmoil, as they sell down about $25bn in loans and junk bonds, the FT reports. Banks have had to make concessions to entice a broader range of investors to buy loans linked to mergers and acquisitions, including offering discounts, amid deepening concerns about the US economy. With a significant pipeline of debt sales planned for the autumn, market participants have been waiting to see whether banks would choose to shift commitments, even at a loss, or hold paper in the hope of an improvement in sentiment. Bankers said they were not confronting a situation comparable to the financial crisis when banks were left holding hundreds of billions of dollars of so-called “hung loans”, but deals backed by private equity groups have struggled to win support among investors.
Lansdowne Partners, the world’s largest equity hedge fund manager, has sold its entire stake in Goldman Sachs amid growing concerns about the profitability of traditional investment banks. The London-based firm liquidated its $850m stake in Goldman – equivalent to about 1 per cent of the bank’s total shares – at the beginning of the year, the FT reports. The call is part of a deliberate strategy at Lansdowne, which with $16bn under management is Europe’s fifth-largest hedge fund, to rotate away from holdings in investment banks and into investments with retail and so-called universal banks, a person familiar with the firm said. The hedge fund, which specialises in making big, deeply researched investment calls, is understood to be concerned by the ongoing effect onerous new US financial legislation – particularly the Dodd-Frank act – may have on the bank.
Credit Suisse will cut 2,000 jobs after becoming the latest bank to announce weak trading in the second quarter, Reuters reports. Net profit fell to SFr 768m ($959m), below the SFr 1bn estimates of analysts and down 52 per cent on the year. Net fixed income sales and trading revenues plunged by 59 per cent, even weaker than the 53 per cent tumble in FICC trading posted by Goldman Sachs earlier this month, reports the FT. Credit Suisse says it will save $562.5m from cutting 4 per cent of its workforce, although it warned that the strong Swiss franc and low client activity were expected to continue, the WSJ says.
Credit Suisse’s profits and revenues in the first quarter failed to match its bumper results of 2010 but were well ahead of the depressed levels of the final three months of last year, the Swiss lender announced on Wednesday, the FT reports. Net profits of SFr1.14bn ($1.3bn) left the Swiss banking group overshadowed by arch rival UBS, which on Tuesday reported buoyant earnings. But Credit Suisse continued to outshine its bigger rival in terms of attracting money from private clients, with net new money of SFr15.7bn compared with UBS’s SFr11.1bn. Earnings were hit by a SFr617m pre-tax charge based on accounting changes to the value of the bank’s own debt, compared with a SFr59m hit last year.
Higher profits at Deutsche Bank have cushioned large writedown costs on its stake in Deutsche Postbank in the third quarter, Bloomberg says. Investment banking activities have however fallen, even if by less than seen at European peers Credit Suisse and UBS. Debt trading revenues were up, although equity revenues fell markedly. Deutsche Bank says that a recent strong rebound in trading had lifted its underlying results, however. Which is rather odd — as third-quarter results from UBS the day before showed little signs of any such rebound, FT Alphaville notes. Who’s right?
That’s the reaction of one City analyst to Tuesday’s third-quarter results from UBS. Read more
A return to positive net money flows at its powerhouse private bank failed to dispel gloom about losses in UBS’s investment banking, as the Swiss banking group reported weaker-than-expected third-quarter results, reports the FT. Net profit of $1.7bn was sharply down on profit made in the previous quarter, although contrasting with a loss made in the same period last year. The figure was also boosted by a large tax credit, with pre-tax earnings looking weaker as investment banking activities recorded large losses. The WSJ goes for a more bullish take, noting that UBS sees a strong fourth quarter ahead of it, even as it faces a challenge to notch up several quarters of renewed client inflows.
Talk about courtroom drama.
From the closing arguments of Lehman’s suit against Barclays (that’s the one alleging an $11bn ‘windfall’ asset grab when Barclays snapped up its best bits in 2008): Read more
JP Morgan kicked off the third-quarter bank earnings season on Wednesday with a better-than-expected set of results.
Earnings per share came in at $1.01 versus a market consensus of $0.90, largely down to lower loan losses in its retail and credit card units. Read more
Wealth managers and private banks say the world’s richest people have embarked on a physical gold-buying spree — by the ton, Reuters reports. Swiss bank UBS said investors were keener to hold physical than to put money in exchange-traded funds or mining equities. But the phenomenon seems to be more a way to bet on a rising gold price than a genuine case of wealth preservation, other bankers add. In any case, UBS in particular is keen to focus on serving super-rich Asian clients as emerging markets rise, Bloomberg reports.
Risk-weighted assets are cropping up all over the place this week.
We’ve had Barclays Capital and Credit Suisse unveiling their own estimates for RWAs under the new Basel III rules. Meanwhile, JP Morgan published a note lamenting the the shift of banks’ securitisation exposures from a capital deduction to risk-weighting. Read more
For your digestion on Wednesday — 15 pages of Basel III brooding.
JP Morgan banking analysts led by Kian Abouhossein have meditated in their latest note on the potential effects of forthcoming Basel III regulations on investment banks, particularly US ones. Read more
Correlation swaps. Next big thing or next big risk factor?
Theo Casey, a MoneyWeek managing editor, has looked at the fledgling asset class in more detail this week. In an article for Futures and Options Intelligence he concludes that for many investors . . . it’s probably the latter. Read more
Barclays has named Bob Diamond, the head of its fast-growing investment bank, as its new chief executive, the FT reports. Mr Diamond will take over strategy in March from John Varley, who is stepping down after leading the bank through the financial crisis without requiring a bailout. Mr Diamond’s succession was largely secured with Barclays Capital’s bold acquisition of Lehman Brothers’ US assets in 2008, making him the bank’s de facto head, reports Bloomberg.
And so the hegemony of investment bankers goes on, argues the FT’s John Gapper — Barclays’ board is clearly satisfied that they need investment banking at the heart of their strategy. Maybe, but Barclays Capital is a pricey jewel in Barclays’ crown — including its vulnerability to costs from Basel III, notes FT Alphaville.
Sighted in the market — a Basel III attack on a UK bank.
Of course, Diamond Bank would really rather continue being Universal Bank, thank you very much. But diamonds don’t come cheap. Read more
That old affluent sparkle seems rapidly to be wearing off Australia’s once seemingly teflon-coated Macquarie Bank – especially after the unthinkable happened and MacBank, once dubbed the “millionaires’ factory” for its exorbitantly high pay scale, was criticised in a UBS analyst note in late July for its “low compensation capability”.
The UBS note, as Bloomberg reported at the time, concluded that Macquarie should cut jobs to boost pay levels and retain talented staff. Read more
Here’s a brilliant report from Bruce Packard at Seymour Pierce on Thursday, which expands in great detail on the rather hypocritical trend of banks scorning unsecured lending while simultaneously fighting over customer deposits — the cheapest form of unsecured borrowing for them.
What’s worrying for the UK, in particular, says Packard, is that it’s the government supported banks like RBS and Lloyds which are clearly most guilty of the practice. Read more