Big banks are suffering lending pain, but not the kind we expected
Banks around the world still have around $80 billion worth of transactions to offload, and losses like the ones US banks have suffered are also a danger to European bank results. Ahead of the second-quarter results, JPMorgan analysts looked at banks’ likely exposures based on their exposure to unsold loans reported in the media. They placed Bank of America as the main player in these blocked transactions, followed by Barclays PLC. On the heels of those two, Morgan Stanley, Citigroup, Deutsche Bank and Credit Suisse, in that order. Citigroup ultimately didn’t do so badly – No. 5 on the list so far – and this kind of analysis is only a rough guide. Credit Suisse and Deutsche are both due to report on July 27, with Barclays the following day.
Alastair Borthwick, chief financial officer of Bank of America, said on Monday that the bank does not have a significant pipeline of other transactions to underwrite, so it should be able to reduce its exposures relatively quickly. JPMorgan has also reduced its risks and tried to reduce its market share since last year. This is good news in some respects, but it could also reflect an upcoming drop in trading advisory fees. Some M&A bankers say they are currently only signing new deals that are likely to close quickly and won’t have any delays for regulatory or competitive approvals.
One of the top areas for banks in the second quarter was M&A advisory fees as previously negotiated deals were either announced or closed. But the collapse in advisory fees on equity sales and debt issuance led to an overall decline in investment banking revenue of about 50% in the second quarter compared to the period of l ‘last year.
Bond and equity trading desks fared much better, benefiting from the volatility and uncertainty that beset investors. Goldman led the way in fixed income, commodities and currencies trading, with revenue up 55% year-over-year in the second quarter; and second best behind JPMorgan in equity trading, with revenue up 11% year-over-year.
Part of Goldman’s secret lies in the growth of its equity and fixed income financing businesses. Stock lending is for hedge funds, and Goldman’s revenue is up nearly 40% year over year in this prime brokerage, as it’s called. In part, Goldman took market share from rivals, especially those in Europe. Its gains also came despite falling stock markets, which reduced the value of hedge fund long positions. Citigroup, for example, reported lower prime brokerage balances in its business due to falling stock values last week. On the fixed income financing side, revenues were up 82% year over year. This activity is driven by the financing and reconditioning of loans granted by other companies such as mortgage brokers or fintechs. The bank said it was also boosted by buyout (or repo) markets in the second quarter.
Total revenue from these two financing businesses has accelerated over the past two years for Goldman. The bank says these are mostly market share gains and the revenue is more sustainable than its other deals. But with new mortgages and refinances in sharp decline in the United States, stock markets still down and many fintechs short of growth, there is a chance that these income gains will also hit a wall during the rest of this year at least.
The lesson to be drawn from the results of US banks in the second quarter is that credit risks generally appear to be well under control. But if interest rates and financial markets do not stabilize over the next few months, expect banks’ income from trade, investment and some forms of financing to slow, perhaps significantly. significant.
More writers at Bloomberg Opinion:
• Wells Fargo and Citi customers are still spending: Paul J. Davies
• British companies are abandoning black professionals: Chris Hughes
• The Beast of Inflation won’t sit still for long: Allison Schrager
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion