U.S. Investment Banks 1Q Results: Summary And Read-Across For European Banks

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Includes: BAC, BCS, C, CS, DB, GS, JPM, MS, UBS
by: Renaissance Research

Summary

Total capital market revenues dropped 22% y/y and totaled $24bn in 1Q16 – the lowest 1Q result since the financial crisis.

Trading was weak with rates being the only exception.

DCM/ECM also weak; advisory did relatively better.

Read-across is negative for UBS and Credit Suisse.

U.S. Investment Banks and money centered banks' share price performance post 1Q16 was strong, despite the fact that total trading & investment banking revenues posted their lowest 1Q since the 2008-2009 financial crisis. However, the expectations were pessimistic enough and the U.S. banks did get a lift from results that, while poor, are less bad than feared.

U.S. IBs 1Q Results Summary

Let's take a closer look at the IB-related revenues for Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS):

1) Total capital market revenues (Equities, FICC, Advisory, Underwriting) dropped 22% y/y and totaled $24bn in 1Q16 - the lowest 1Q result since the financial crisis.

Total Capital Market Revenues 1Q16: y/y growth rates

Source: Company reports, Bloomberg, Renaissance Research

2) FICC trading was weak with rates being the only exception.

In 1Q16, FICC woes continued - FICC trading revenues declined on a y/y basis in 8 of the last 11 quarters and this marked the largest y/y decline since 3Q10. Within the FICC, the only bright spot was rates business, which continues benefiting from volatility and a dynamic rate backdrop. Other products (Credit, Securitized products, Commodities, FX) were weak. FICC results were particularly poor for those banks with large MtM portfolios of low-rated credit assets (Morgan Stanley).

FICC Trading 1Q16: y/y growth rates

Source: Company reports, Bloomberg, Renaissance Research

3) Equity trading was also weak: revenues fell 14% y/y

Equity trading 1Q16: y/y growth rates

Source: Company reports, Bloomberg, Renaissance Research

Total trading revenues 1Q16: y/y growth rates

Source: Company reports, Bloomberg, Renaissance Research

4) Advisory: MS and JPM were supported by higher completed M&A activity

Advisory fees 1Q16 - y/y growth rates

Source: Company reports, Bloomberg, Renaissance Research

5) Debt underwriting - GS stood out due to strong investment-grade issuance.

Debt underwriting fees 1Q16 - y/y growth rates

Click to enlarge

Source: Company reports, Bloomberg, Renaissance Research

6) Equity underwriting results were dismal due to a significant decrease from IPOs.

Source: Company reports, Bloomberg, Renaissance Research

What do these numbers mean for capital market revenues at the European IBs?

UBS (NYSE:UBS)

UBS will release its results on 3 May.

Outlook for UBS IB-related revenues is very weak due to: a) Large exposure to equity trading (see the diagram below); b) A large y/y decline in FX trading on the back of the Swiss franc event in 1Q15; and c) A weakness in spread businesses (Credit/Securitization), which have suffered the most due to the severity of moves on HY credit and CDS markets.

UBS: IB-related revenues breakdown

Source: UBS presentation, Bloomberg, Renaissance Research

Credit Suisse (NYSE:CS)

CS will publish its results on 10 May.

Outlook for CS results looks very similar to UBS' one a) Large exposure to equity trading (see the diagram below); b) A large y/y decline in FX trading on the back of the Swiss franc event in 1Q15; and c) A weakness in spread businesses (Credit/Securitization. Also Credit Suisse will likely post large mark-to-market losses on low-rated credit portfolios (Morgan Stanley revenues fell 54% y/y on the back of this).

Credit Suisse: IB-related revenues breakdown

Source: CS presentation, Bloomberg, Renaissance Research

What about Barclays and Deutsche Bank?

Barclays (NYSE:BCS) and Deutsche Bank (NYSE:DB) have recently published their results, which perfectly confirmed the trends we have seen at U.S. banks. Both banks beat consensus expectations, thanks to a large rates business, which also performed very well within the U.S. FICC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.