The fruits of a substantial, if patchy, recovery in capital markets over the past year have not been evenly shared between the main investment banks. These 10 vignettes – some positive, some less so – tell the story of a disjointed industry. My latest column for Financial News:
Nomura has been one of the whipping boys of the investment banking industry ever since it bought the rump of Lehman Brothers’ business nearly five years ago for the deceptively low price of $2.
But now Nomura is, in one area at least, defying its critics. It was the only investment bank to post a double-digit increase in its fixed income revenues in the first half of this year (with growth of 12% compared with a decline of 9% across the industry). Over the past 12 months to the end of June, its FICC business has grown by one third (second only to a rebounding Credit Suisse), and it has doubled its market share of FICC revenues since 2010.
Nomura has had fewer pre-crisis legacy issues to deal with and has started from a smaller base, enabling it to pick off business from some of its struggling mid-tier rivals.
It’s still a relative minnow – its FICC revenues of about $4.8 billion are less than one third those at JP Morgan – but under head of global markets Steve Ashley, Nomura at least seems to have rediscovered some purpose and be heading in the right direction. The investment bank has now been profitable for four quarters in a row. That may not sound very impressive, but for Nomura it’s quite a feat.
2. Goldman Sachs: Digging deep in DCM
Goldman Sachs is never one to miss an opportunity. But the US bank has probably surprised even itself with how much progress it has made in so little time in debt capital markets.
It has almost doubled its revenues from DCM to more than $2.4bn (in a market that increased by 40%) over the last 12 months, and leapfrogged Barclays, Citigroup, Credit Suisse and Deutsche Bank into third place in terms of revenues.
Having posted back-to-back record quarters for DCM in the first half of this year, its revenues are nearly double those in equity capital markets (not so long ago it was the other way round) and for the first time the unit has overtaken Goldman Sachs’ banner advisory business.
The DCM unit, which is overseen by global head of financing Stephen Scherr, has been helped by high-profile deals such as the $17bn Apple bond issue (described by one partner at Goldman Sachs as a deal that “broke the record for the number of records broken in a single deal”).
3. Barclays: Making it big in equities
When Barclays bought the US business of Lehman Brothers at the height of the financial crisis you would have got pretty good odds against it being able to build a top-five global equities business. But over the past year it has achieved just that, charging past Bank of America Merrill Lynch, Deutsche Bank and Societe Generale into fifth place. In 2009, it was ninth.
While the industry has benefited from a 20% increase in equities revenues over the past year, Barclays’ business grew by just over 50%. It has been boosted by the strong US equities business that it inherited from Lehman – useful when the US market accounts for roughly half of equities revenues worldwide and has been on steroids for the past year – but it has also rolled out a second “domestic” market in the UK (and to a lesser extent continental Europe) over the past few years. Revenues of $4bn over the past four quarters are a lot less than the $10bn-plus Barclays made in fixed income, but the gap is closing.
4. JP Morgan: Getting bigger and bigger
Over the past year, JP Morgan’s corporate and investment bank has extended its lead over rivals in terms of overall revenues, fixed income and investment banking (it was one of just four banks to post a rise in fixed income revenues in the first half). Equities, in which it ranks fourth, was the only business where growth lagged its peers.
Its regulatory problems aside, JP Morgan is forming a super-league of just two banks (with Goldman Sachs) with a chasing pack of four others increasingly far behind. To put its sheer scale in perspective, over the past four quarters the corporate and investment bank made as much in pre-tax profits ($14.6bn) as the investment banks at BNP Paribas, Credit Suisse, Morgan Stanley, Nomura, RBS, Societe Generale and UBS. Combined.
5. Citigroup: The empire striking back
One bank that would dearly love to knock JP Morgan off its perch is Citigroup. And, contrary to what you might expect, it looks like it is at least closing the gap. The securities and banking division at Citi posted the best relative performance of any big investment bank in the first half of the year, improving on all 10 of a selection of metrics – and outperforming its peers on nine of them. This improvement is the delayed result of a turnaround that started a few years ago under James Forese, but which has only recently become visible. On almost every measure, Citi hit a post-crisis low in 2011 but it has been steadily improving across the board since then.
It has reasserted its dominance in fixed income, is gaining ground in investment banking, and even its equities business has arrested years of decline.
6. UBS: Looking like it’s working
It’s still early days, but it looks as if the radical restructuring at UBS investment bank late last year is working.
It was the fastest growing investment bank in the first half of this year in terms of revenues, with an increase of more than one third. Its equities business recovered from losses on the Facebook IPO last year with an 80% rebound in revenues, while investment banking revenues jumped by one quarter.
The only area of disappointment was in fixed income (perhaps not surprising given that UBS pulled out of large chunks of the business). As a measure of its progress, its cost income ratio dropped from 90% in the first six months of last year, to just 65% in this year’s opening half, and the slimmed down bank was the most profitable investment bank on the street with a pre-tax return on equity of 43%.
Of course, it has achieved this in part by placing tens of billions of dollars of non-core assets in a legacy unit. But at least the early evidence suggests that beautiful does not have to mean big.
7. Credit Suisse:Exceeding expectations
When it comes to restructuring, it is something of a mystery how Credit Suisse allowed UBS to take the credit for making all the tough decisions when it had decided a full year earlier to bite the bullet and launch a radical restructuring of its own. And, for an investment bank that has successfully promised a strategy of over-promising and under-delivering for more than a decade, it makes a pleasant change to see that the surgery is working.
Over the past 12 months, the investment bank at Credit Suisse has grown by about one third and outperformed in every segment. For good measure it has turned a pre-tax loss of more than $1bn in the year to June 2012 into a pre-tax profit of more than $3bn. It still has more work to do on costs, leverage and profitability, but co-heads Gaël de Boissard and Eric Varvel should be pleased with their progress.
8. Deutsche Bank: Leading the charge
As its local rivals fall by the wayside one by one, Deutsche Bank is in danger of being the last European investment bank left standing with a genuine chance of finding itself in the super-league when the dust settles.
In the year since Anshu Jain stepped upstairs to become co-chief executive of the group and handed the reins to the inexperienced Colin Fan and Rob Rankin, Deutsche Bank has perhaps surprised its rivals by outperforming the market on most measures while simultaneously restructuring the business.
It is back up to fifth in terms of overall revenues and third in fixed income, although it still has work to do in equities, advisory and cost control.
Barclays would disagree with the above assessment – and in fairness is breathing down Deutsche Bank’s neck on virtually every measure – but one key difference is that unlike Jain, group chief executive Antony Jenkins is almost apologetic about owning a successful investment bank.
9. Morgan Stanley: Solving the FICC problem
Some things – such as Morgan Stanley’s inability to string together more than a few quarters without a surprise in fixed income – never change.
In the first half of this year, Morgan Stanley was slightly off the pace in both equities and investment banking, but in FICC if was almost off the scale, with revenues falling by more than one fifth (double the decline for the rest of the industry). At this rate its fixed income business will be overtaken by Nomura in the next few quarters.
Rob Rooney and Michael Heaney, the latest executives charged with sorting the business out, face an interesting challenge ahead.
10. BNP Paribas and RBS: Bringing up the rear
Sadly, not everyone can be a winner and this year the two most notable joint non-winners this year have been BNP Paribas and Royal Bank of Scotland.
BNP Paribas – one of the big boys in European fixed income – posted its worst quarter in fixed income since before the financial crisis in the second quarter, and it underperformed on almost every measure in its capital markets and advisory division in the first half.
Most worrying, pre-tax profits fell by a quarter compared with last year, against an increase of nearly one fifth at its rivals.
RBS showed what happens when politicians start running an investment bank: as the markets division cut another few thousand staff at the behest of the UK government, its revenues dropped by a third and its pre-tax profits fell by two thirds.
Profits in the first half of this year were 90% lower than they were in 2009, which takes some doing – even for someone as talented as George Osborne.
- The numbers in this article are from my own analysis of the performance of the top investment banks. The figures exclude own CVA/DVA and have been converted into US dollars at prevailing quarterly exchange rates.
- This article first appeared in the print edition of Financial News dated September 2, 2013