Halcyon days over for investment banks
The runaway profits of the past will not be repeated. That is the response of investment bankers when asked about the unfamiliar glow that surrounded their industry in the final months of 2016.
The sector’s third-quarter results were impressive, with industry revenues up by 30 per cent in some business lines. Shares in investment banks rose more than 25 per cent after Donald Trump’s election as US president, as investors eyed a bright future of better growth, higher rates and less regulation.
To some industry observers it looked like the good times of 2006 had returned. “I don’t think so, I don’t even remember how that  felt,” says Manuel Falco, Citi’s head of corporate and investment banking for Europe, the Middle East and Africa.
The most meaningful bright spot in 2016’s apparent flurry of good news was the performance of the fixed income, currency and commodities area of banks’ markets businesses. “It feels like fixed income, an asset class in which wallet has been reducing year in and year out, [it] looks like in 2016 it found its base,” says Daniel Pinto, chief executive of JPMorgan’s investment bank.
Mr Pinto expects the overall fixed income, currencies and commodities (FICC) wallet — the total amount of fees shared across banks — to be down about 1 per cent for 2016, a far more muted fall than the 12 per cent average annual drop from 2012 to 2015 as extra capital charges and restrictions depressed revenues.
But that is a 1 per cent fall in a year when Brexit and the US presidential election triggered record trading volumes in currencies and bonds. And FICC would have a mountain to climb to get back to its halcyon days. In 2010, 13 of the world’s biggest banks made revenues of $116.5bn in fixed income, or 18 per cent of group-wide revenue, according to data from Deutsche Bank Research and the Financial Times. By 2015, FICC revenue across the group was just $71.65bn, or 12.6 per cent of their total revenue.
Investment banks’ declining importance in their parent company is key to any assessment of their recovery potential. FT research shows that in 2007, the world’s 13 biggest investment banks by revenue dedicated two-thirds of their assets to their investment banking activity. Now investment banks have less than half group-wide assets, and the proportion will fall further once banks complete promised cuts.
With banking groups also dedicating fewer staff to investment banks, it is no surprise that investment banks’ contribution to underlying group-wide profits is diminishing too so any rebound in investment bank profitability would be far less significant for banks’ overall performance now than in 2007.
The investment bank withdrawal was not uniform of course. In recent years it has been more pronounced at European banks, gifting easy wins to the Wall Street banks. Therein lies another reason why 2017 is not looking as rosy as recent months’ headlines suggest.
“That situation is largely over,” says Mr Pinto. “To a very large extent, the changes in business model that each of the banks chose to execute, those are pretty much in place, so I do see less of the differentiation in performance across [European and US banks]. If the wallet grows slightly it’s likely that everyone will do better rather than one bank versus the other.”
Expectations for what that wallet might do in 2017 are largely bound to Mr Trump’s impending presidency, which offers the promise of better US economic growth, higher interest rates and the unwinding of some of the more onerous regulations introduced after the financial crisis.
”The reality is that nothing has been fully confirmed?.?.?.?there is still a lot that is unknown,” says Andrea Orcel, president of UBS’s investment bank. Mr Orcel says the challenge for banks like his is “to remain flexible and nimble so that the businesses can be positioned to capture any upside whilst not deviating from their core strategy”.
In other words, UBS, which became the most prominent example of scaling back investment banking in a 2012 overhaul, will not be moving back in just because some of the omens look good though the bank will be “selectively hiring” in areas such as fixed income, rates and credit and equities “where we are seeing real traction”.
“What will be interesting to see is if a pick-up in activity translates into profitability. Revenues are important, but the measure of success that we should be striving for is growth in profits,” says Mr Orcel. “That’s what really matters and that is what shareholders are demanding — rightly so.”
Citi, which has remained committed to the full-service investment bank model throughout the crisis, is also cautious. Mr Falco stresses that there are a “lot of very important things ahead that will be crucially important for the future of Europe”.
Rating agency DBRS wrote in its outlook note for 2017 that “potential downside risks remain significant for European capital markets participants in 2017”, pointing to the “continued political, regulatory and litigation uncertainty” from Brexit and elections in the EU.
“We are more bullish than we were but we’re going to take it day by day,” says Mr Falco. “The future is very difficult to predict. 2016 has probably been the worst forecasted year [ever].”
但这种1%的降幅是在英国退欧和美国总统大选引发外汇和债券创纪录交易规模的一年里发生的。FICC业务将需要克服如山的困难才能恢复其巅峰时期的盛况。德意志银行研究部(Deutsche Bank Research)和英国《金融时报》的数据显示，2010年，全球13家最大银行实现固定收益收入1165亿美元，占到集团总收入的18%。到2015年，FICC收入只有716.5亿美元，占到集团总收入的12.6%。