Big banks take multi-billion dollar hit after 9 percent FICC revenue drop in 2015

BY Fraser Tennant

Big banks took a multi-billion dollar hit last year with a new snapshot of earnings and volumes revealing that revenue from fixed income, currencies and commodities (FICC) trading was down 9 percent in 2015 for the world’s 12 largest investment banks.

In its ‘IB Index – FY15’ report published this week, which analyses the public disclosures of the aforementioned banks, Coalition confirms that FICC trading revenue was $69.9bn for FY2015 compared to $76.7bn in FY2014 (the figure was $109.1bn in 2010).

Much of this decline, according to the report, can be attributed to the impact of regulatory changes (Basel III) which require banks to hold higher levels of capital and liquidity. In addition, trends such as high litigation costs and volatile markets have led to job losses and business line exits which have substantially impacted the banks’ FICC activities (usually one of the most profitable areas).

The Coalition analysis tracks the public disclosures of Bank of America Merrill Lynch; Barclays; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; HSBC; JPMorgan; Morgan Stanley; Societe Generale; and UBS.

Additional key findings in the report include: (i) commodities revenues dropped by 18 percent, due mainly to slow business in metals and investor products; (ii) investment banking divisions (IBD) saw a 5 percent fall in revenue to $40.5bn due to a surge in M&A activity being offset by declines in equity and debt capital markets activity; (iii) return on equity (RoE) declined slightly to 9.2 percent from 9.3 percent, due to both increased capital requirements and weak performance; and (iv) poor trading results and low client activity in the second half of 2015 contributed to an overall 3 percent decline (to $160.2bn) compared to a year ago in investment banking revenue across the world's major banks.

However, in contrast to the above litany of gloom, Coalition reported that the banks' equity businesses - including cash equities, equity derivatives, prime services and futures and options – did well in 2015, with revenue rising 10 percent to $49.8bn.

“Poor trading results and low client activity in 2H led to a marginal decline in IB revenues for FY15”, said Coalition in summation. “Equities outperformed at the start of the year, but Fixed Income struggled throughout, especially in Credit, Securitisation and Commodity related activities. IBD declined as improvements in M&A were more than offset by declines in ECM and DCM volumes.”

Report: Coalition IB Index – FY15 February 2016

Confidence in 2016 revenue growth is high, say global asset management CEOs

BY Richard Summerfield

Confidence among global asset management CEOs that revenue will grow in 2016 is currently at a high level (90 percent), according to PwC’s 19th Annual Global CEO Survey published this week.

The survey, which quizzed 189 asset management CEOs in 39 countries, also found that over the next three years this boom in confidence will rise to 95 percent.

However, a mere 30 percent of the CEOs said that they expected the global economy to improve over the next 12 months, a view that does not impact on the confidence they have in the ability of their company to achieve strong revenue growth this year and beyond.  

Additionally, the survey reveals that most asset management CEOs believe ‘responsibility’ will play an important part in their success in five years’ time. Furthermore, 86 percent stated that they will prioritise long-term over short-term profitability. Sixty-nine percent also said that they will report on both financial and non-financial matters, while 68 percent anticipate corporate responsibility being a core venture.

“Asset management is going through a time of fundamental change," said Barry Benjamin, global asset and wealth management leader at PwC. “This is a time of great opportunity for growth, yet asset managers need to become more innovative, leverage technology, manage a wider range of risks and use digital communication intelligently if they are to remain competitive. In ten years’ time the sector is likely to be far bigger, but asset management companies will look very different from today.”

As well as concerns over the global economy, global asset management CEOs see over-regulation, geopolitical uncertainty, volatile exchange rates and interest rate rises as major threats to growth. In addition to these, the survey also reveals that 61 percent of asset management CEOs believe that shifting customer behaviours are a threat to growth; 60 percent view cyber security as an escalating issue; and 61 percent consider stock market volatility to be a constant concern.

Yet, despite the threats identified by CEOs, Mark Pugh, UK asset and wealth management leader at PwC, believes that asset managers are on the right side of a number of powerful trends. He said: “Retirement patterns across the globe, especially in the UK with recent Pension Freedom reforms, are leading to opportunities as well as creating a wider set of stakeholders.”

News: Asset management CEOs positive as they innovate to take centre ground - PwC’s 19th Annual Global CEO Survey

Report: PwC’s 19th Annual Global CEO Survey

Financial services firms report strong business growth but sober optimism in new survey

BY Fraser Tennant

Financial services firms are reporting strong growth in business volumes and improving profitability, according to the latest CBI/PwC Financial Services Survey published this week.

The quarterly survey, which reflects the views of 100 financial services firms in the three months to December 2015, reveals that the overall level of business remained “above normal” – despite the fact that business with overseas customers fell to its lowest level in three years.

The survey also found that although there was a marked increase in optimism in the financial services sector in the first half of 2015, this had risen only slightly by the year’s end due to the impact of strong competition on incomes (though tight cost control has helped to support a growth in profitability).

Key findings in the CBI/PwC survey include: (i) 45 percent of financial services firms stated that business volumes were up, while 22 percent said they were down; (ii) 30 percent of firms expected business volumes to increase, while 20 percent said they expect to see a fall; (iii) 14 percent of financial services firms indicated they felt more optimistic about the overall business situation compared with three months ago, while 8 percent said they felt less optimistic; and (iv) 29 percent of respondents confirmed that, in volume terms, their level of business was above normal, while 18 percent stated that it was below normal.

Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, Rain Newton-Smith, CBI Director for Economics, is aware of the downside risks from developments overseas. She said: “The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.

“While investment intentions remain robust in IT, and marketing spend is set to expand as firms seek new customers, elsewhere companies are curtailing their capital spending due to poor returns.”

Over the next 12 months, the survey forecasts that financial firms expect to see weaker growth in business volumes, in addition to flat income and rising costs. In the meantime, employment prospects remain mixed, with banks in particular reporting a fall in employment.

“It’s clear that optimism is muted across the whole (financial services) sector and each sub-sector has its own challenges," commented Kevin Burrowes, UK financial services leader at PwC. “Against this backdrop, the growing spectre of cyber-crime looms large and the threat of major attacks continues to stalk the entire financial services industry.”

Report: CBI/PwC Financial Services Survey December 2015

EBA confirms “no exemption” approach to banker bonuses

BY Fraser Tennant

Every bank is to be subject to the same staff bonus cap according to new guidelines published by the European Banking Authority (EBA) this week.

The regulator’s guidelines, its final statement on remuneration policy, are designed to ensure that financial institutions correctly and consistently calculate the bonus cap by mapping remuneration components into either fixed or variable pay, as well as detailing allowances, sign-on bonuses, retention bonuses and severance pay.

The EBA does, however, recommend exemptions from certain aspects of the EU's latest Capital Requirements Directive (CRD IV) remuneration rules for smaller banks and operators, such as asset management firms.

To this end, the EBA is of the opinion that legislative action is required in order to clarify and ensure that the CRD remuneration requirements are applied consistently across the EU. At present there are a number of national rules regarding the application of proportionality, including the waiving of requirements, which has led to an uneven playing field between institutions across the EU.

“While smaller asset managers and banks will be relieved that the EBA believes the deferral rule should not apply to them, for larger asset managers the situation is particularly concerning," asserts Jon Terry, a reward partner at PwC. “The EBA appears to be suggesting that they should no longer be able to avoid remuneration requirements on deferral and payment in instruments.”

However, the EBA’s attitude does not constitute a legal basis and the guidelines are essentially “neutral” on this particular aspect. For the moment, the CRD general principle of proportionality determines how waivers are applied – a scenario very much subject to change.

"Many assets managers and smaller banks will be very concerned that the EBA is proposing changes to the Directive that would require that all firms, regardless of size, will be subject to the bonus cap. It appears current practices will apply for 2016, and the guidelines have simply provided a stay of execution until 2017. Although the situation is not yet certain - changes will need to go through the European legislative process, which can be lengthy.”

The EBA Guidelines, based on the so-called ‘comply or explain’ principle meaning that Competent Authorities have two months to state whether or not they will comply with them, are due to come into force across the EU on 1 January 2017.

Report: EBA guidelines on sound remuneration policies

UK regulators get “tougher” on financial wrongdoers

BY Fraser Tennant

UK regulators are “getting tougher on financial crime” by issuing increasingly stringent penalties to wrongdoers, according to new analysis published this week by EY.

EY’s Investigations Index reveals that, over the past two years, the punishments handed out by the UK’s regulatory bodies – the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO), the Competitions and Markets Authority (CMA) and the Office of Fair Trading (OFT) – saw fines soar by 271 percent (with £2.45bn issued in the past two years) and prison sentences increase 124 percent. Company directors also face an average prison sentence of four years or more.

Additional findings in the EY study include: (i) 58 percent of cases investigated by the SFO resulted in prison sentences; (ii) 56 percent of cases investigated  by the FCA resulted in fines; (iii) of the 82 cases investigated by the FCA over the course of two years, 25 were against individuals; (iv) of those 25 cases, 36 percent resulted in prison sentences; (v) 10 percent of all cases dealt with individuals or firms committing fraud; and (vi) of the 125 cases investigated by the CMA and OFT in the past two years, 119 were due to a proposed or completed merger or acquisition.

“UK regulators are getting tougher on financial crime," said John Smart, head of EY’s UK Fraud Investigation & Dispute Services team. “In the wake of recent corporate scandals and growing political pressure, there seems to be a greater focus by the regulators to pursue cases that may once have been considered ‘too difficult’, to ensure those responsible for wrongdoing are held to account.”

Despite the tougher stance, the Index did find that the average prison sentence has decreased by 40 percent over the past two years, from 87 months to 52 months.

Nevertheless, Mr Smart believes that the Index findings should also serve as a warning to companies, to review their processes on a regular basis, stating that the top reasons for fines, namely systems failings, business misconduct and misleading information, were all factors that could have been avoided by having stronger control processes to identify and resolve any corporate blind spots.

The EY Index examined 231 cases (which took place between 1 October 2013 and 30 September 2015) involving fines and criminal prosecutions against business and individuals.

News: U.K. Regulatory Fines Soar Amid Crackdown on Financial Crime