provide further evidence of Trump boost (FT)
Investment bank posts big rise in revenues as investors warm to regulatory
Jefferies provided fresh evidence of a Trump-fuelled recovery for
Wall Street as it posted a big rise in revenues and a near-record quarterly
profit. Share prices in the big banks have performed strongly since Donald Trump
swept to victory last November, on the promise of higher growth, lower taxes and
lighter regulation of the financial sector, although recently rally has run out
of steam as concerns arise about the pace of policy change. Results for the
quarter ending in December were some of the best for years, after particularly
strong performances from bond trading units boosted by the prospects of interest
rate increases from the US Federal Reserve.
On Tuesday, Jefferies added
to the cheer by announcing that net revenues of $796m for the three months to
February were up more than two and a half times from a volatility-hit period a
year earlier, when simultaneous slumps in stocks, bonds and commodities had
prompted Rich Handler, chairman and chief executive, to reflect on an
“incredibly humbling” period. This year had a much better start, Mr Handler said
on Tuesday, describing a “reasonably robust” environment for sales and trading
and a “good” quarter for advising companies on deals and fundraising. Net income
of $114m for the period was a whisker away from the record $120m of the fourth
quarter in 2013.
The figures from Jefferies, which has an unusual
November financial year end, are normally a curtain raiser for the bigger
investment banks, which report first-quarter figures in mid-April. So far, many
have made encouraging noises about conditions in capital markets, saying clients
are continuing to turn over portfolios more frequently. “It feels like the
fourth quarter, maybe slightly better,” said Colm Kelleher, president of Morgan
Stanley, at a conference in London on Tuesday afternoon. Mr Kelleher noted that
many banks across Wall Street had pared their cost bases to the point where
increases in revenues would flow straight to the bottom line. “The degree to
which you get tailwinds, such as a pick-up in client activity and regulatory
forbearance, is only going to help,” he said.
consider radical action to keep equities plate spinning (FN)
With the many pressures facing most banks' equities divisions, perhaps they
should consider teaming up
Running an investment bank these days is a bit
like spinning plates. No sooner have you got one of them whizzing round nicely
than another threatens to crash to the ground.
In the last few years it
has been fixed income trading that has needed the most attention, knocked off
course by tougher capital rules and reduced customer flows. Thanks to rising US
rates and the Trump bump, trading in bonds and foreign exchange is at last
looking more stable.
Now it is equities that is wobbling badly. Lower
volumes, falling commissions and mounting technology costs have put the business
under intense pressure just as regulatory change is threatening a slump in
revenue from research. It is time for banks to consider radical action.
For years there has been excess capacity in equities. Insiders say that only the
very biggest banks make decent returns and the gap between the leaders and the
rest is widening. The global top three, Morgan Stanley, JP Morgan and Goldman
Sachs, together with UBS in Europe and Asia, have been increasing their market
share while banks that are strong in other areas, such as Citi and Barclays,
have struggled to keep up.
Lower down the league, some have thrown in the
towel. Last year Nomura pulled out of research and underwriting in London, while
retaining its electronic agency broker Instinet. Few have been anything like as
And now the game is getting tougher still.
equities trading tumbled 13% at the top dozen global investment banks in 2016
according to Coalition, the research firm. And a partial recovery in the last
quarter has proved short-lived. Barclay's analysts say that global equity
trading volumes in January and February were down 14% on last year and equity
derivatives were 22% lower.
So what can the banks do?
is to pull back in the most difficult parts of the business, such as
derivatives. But George Kuznetsov, head of research at Coalition, says it is
unlikely big banks will significantly reduce or exit large blocks of equities
products partly because the cost savings would be relatively modest. “They will
also be concerned about the material negative impact on revenue in other
products across the broader equities platform.”
The conventional wisdom
is that clients want banks to offer a full service across all equities products
and retreating in one area would threaten the wider business. Similar warnings
were issued when banks such as UBS pulled back from some fixed income products
yet the rest of the business has proved more resilient than many predicted. But
equities folk insist that their business really is indivisible. They also point
out that a strong equities trading platform is essential to get equity capital
markets work which can be much more profitable (and has picked up sharply this
year after a dismal 2016).
While there have been cutbacks, particularly
in Asia, some of the banks outside the top tier, such as Deutsche Bank and
Credit Suisse, are talking about selective investments in their equities arms.
The common strategy seems to be a desperate race to the top that only a few can
At the same time all the banks are facing a new challenge from the
European reforms to payment for research. Designed to separate payment for
research from trading commissions, the EU rules that come into force in January
next year will require fund managers to pay for research themselves or to pass
on the cost to clients in separate accounts. Likely to be adopted by the big
banks globally, the changes are expected to result in a sharp fall in the amount
asset managers pay for bank research which currently represents about half of
The assumption is that many banks will make big cuts in their
research operations and asset managers will hire more analysts themselves.
Some asset managers say this would be bad for their clients. Mark Burgess,
head of equities at Columbia Threadneedle, says it would ultimately cost clients
more if scores of managers built their own teams of analysts than if they shared
the resources of a few big banks.
The head of another asset manager says
his firm has considered setting up joint research operations with other
managers. But there is a better solution: banks should cut costs by setting up
equities joint ventures with their rivals.
There are some successful
precedents, such as Exane BNP Paribas and Kepler Cheuvreux, which has
partnerships with UniCredit and Crédit Agricole.
Insiders believe some of
the top banks might consider similar partnerships with boutiques or fintech
But what about a joint venture between two big banks? Is it
really unthinkable to have a partnership in equities trading and research
between, say, Deutsche Bank and Credit Suisse?
True, it would be
logistically and culturally much more difficult. But it might be the best way to
keep all the plates spinning.