Feb. 14 (Bloomberg) -- The biggest U.S. banks captured the highest share of global trading revenue in at least two years as their counterparts across the Atlantic reduced risk in the fourth quarter amid a worsening sovereign-debt crisis.
U.S. banks’ share of the total reported by the nine largest investment banks rose to 66 percent from 56 percent a year earlier and 60 percent in the third quarter. The increase occurred as revenue from trading stocks, bonds and derivatives at the five U.S. banks -- JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America Corp. -- fell for the sixth time in the past seven quarters.
Investment banks in Europe have been aggressive in shrinking risk-weighted assets and shutting units. Deutsche Bank AG brought its trading risk down to the lowest since 2003, while Zurich-based Credit Suisse Group AG took a charge of 469 million Swiss francs ($512 million) to cut assets and exit some fixed- income trading businesses.
“There are some trends being seen across a lot of different competitors and across a number of business lines, which if they play out the way it looks so far, could help the U.S. capital-markets banks in terms of market share,” said Guy Moszkowski, an analyst at Bank of America in New York.
U.S. banks’ gain in trading-revenue share represents a bigger slice of a shrinking pie. It also shows how the European debt crisis is reshaping the banking landscape as lenders sell businesses and seek to assure investors their funding is stable.
Trading Decline
The nine firms that reported the highest trading revenue in 2010 -- the group also includes Barclays Plc, Deutsche Bank, UBS AG and Credit Suisse -- posted a 28 percent decline in the fourth quarter, to $19.9 billion, from the same period a year earlier. That’s less than half the $52 billion the banks reported in the first three months of 2010. Trading revenue for all of last year fell 16 percent.
The figures exclude the effect of accounting gains and losses tied to the banks’ own credit spreads, known as debt- valuation adjustments, or DVA.
The global revenue pool for fixed income may decline about 10 percent this year because of weaker customer activity, continued challenging trading conditions and regulatory pressures, Kinner Lakhani, a Citigroup analyst in London, said in a Jan. 25 note. Equity and primary revenues are expected to show “modest growth,” the report said.
“The 2012 outlook remains challenging not least because we expect the sovereign crisis impact to ‘spill over’ into the first quarter,” Lakhani wrote.
Credit Suisse, Barclays
Credit Suisse posted a loss before operating expenses from fixed-income trading in the fourth quarter, and Deutsche Bank and London-based Barclays each reported overall trading-revenue declines of more than 33 percent from a year earlier. Citigroup, based in New York, was the only U.S. bank to have that large a falloff, while Morgan Stanley was the only one of the nine firms to show an increase.
For the full year, European banks maintained the same 39 percent share of trading revenue they had in 2010. The fourth- quarter drop came from some one-time charges to exit businesses and a greater reliance on the European market, which faced a bigger decline in prices and volumes, according to Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets.
“European fixed-income trading was under a lot of pressure because of the sovereign-debt crisis,” Becker said in an interview. “I don’t think the market-share losses will remain forever. It was just the fourth quarter. The market has settled in the first quarter.”
Cheap Money
The European Central Bank in December flooded the banking system with cheap money to avert a credit crunch. Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion euros ($645 billion) of three-year, 1 percent loans from the Frankfurt-based ECB at an auction. The European banks among the nine biggest trading firms said they didn’t borrow from the ECB.
Shares of the four are up 18 percent this year after falling an average of 32 percent in 2011. The five U.S. banks have gained an average of 29 percent after dropping 43 percent last year.
Still, European banks are facing head winds. The euro- region economy is expected to shrink 0.5 percent this year, while the U.S. may expand 2.2 percent, according to data compiled by Bloomberg. Regulators in Switzerland also are holding their banks to higher capital ratios than U.S. lenders are expected to face under rules approved by the Basel Committee on Banking Supervision, forcing them to shrink assets.
“One reason for the poorer trading performance by European banks is they cut back risk and have to reach higher capital levels,” said Georg Kanders, an analyst at Dusseldorf, Germany- based WestLB AG who has “buy” ratings on Deutsche Bank and Credit Suisse and a “neutral” on UBS.
Reducing Risk
Credit Suisse’s investment bank cut its risk-weighted assets as defined under Basel III rules by $47 billion in the fourth quarter and plans to trim an additional $33 billion in the first quarter, reaching the level targeted for the end of this year nine months early, the bank said last week. The risk reductions and charges for job cuts cost the bank 981 million francs in the period.
UBS’s investment bank shrank risk-weighted assets by about 26 billion francs in the fourth quarter. Of that, about 8 billion francs were in “core” businesses at the investment bank and were a result of “lower market risk in our trading book,” Chief Financial Officer Tom Naratil told journalists and analysts in Zurich last week.
‘Resizing’ Businesses
“The Swiss banks are responding to the higher capital requirement by resizing the trading business fairly dramatically,” said Moszkowski of Charlotte, North Carolina- based Bank of America. “The U.S. banks have regulatory issues as well. It’s really going to be a question of degree.”
European banks cut risk in the fourth quarter as Italy changed prime ministers, Portugal’s debt rating was cut to junk by Fitch Ratings and Greece struggled to reach an agreement with bondholders on a deal to restructure its debt.
Deutsche Bank cut its average value at risk at its corporate and investment-banking unit to 56 million euros in the quarter, the lowest since at least 2003, company reports show. The bank’s value at risk, or VaR, is a measure of how much it could lose in trading in one day, with a 99 percent probability.
The bank will increase its VaR since that level isn’t sustainable, according to CFO Stefan Krause.
“We made a conscious decision in the fourth quarter of last year to really reduce risk,” Krause told analysts on a Feb. 2 conference call. “It did not impact our January results, as far as I can see from this seat right now at all, because the results are quite good and therefore not a concern at this point.”
Reversal of Fortune
Value at risk at UBS’s investment bank fell to 36 million francs in the fourth quarter, the lowest level in at least three years. While the Zurich-based firm may increase VaR in the coming quarters, it won’t be a “major” increase, Chief Executive Officer Sergio Ermotti, 51, said last week.
The gains by U.S. banks are a reversal of the advances European lenders made in 2008 and 2009, when U.S. firms were going through a credit crisis and recapitalization, according to Morgan Stanley CFO Ruth Porat. U.S. banks including Merrill Lynch & Co. and Bear Stearns Cos. generated a revenue share of about 65 percent in 2006. That fell to 61 percent by 2010.
European banks, excluding lenders in Greece and those in the midst of restructuring, plan to boost capital by about 98 billion euros, 26 percent more than regulators originally required, the European Banking Authority said last week.
U.S. Opportunity
“In 2008, European banks took share from U.S. banks, and that’s obviously when this country was going through its capital raise focus and liquidity raise,” Porat said on a conference call with analysts last month. “Given that European banks are now going through similar issues, we do see this as an opportunity to gain share.”
Morgan Stanley, based in New York, gained 6 percentage points of trading-revenue market share, the largest year-over- year increase in the fourth quarter of any of the nine banks. Barclays and Credit Suisse lost the most, with each falling 5 percentage points.
Some U.S. banks don’t see the pendulum swinging back to Europe anytime soon. Goldman Sachs CFO David Viniar listed “market-share opportunities in Europe” as one of the New York- based firm’s long-term areas of growth at an investor conference in Miami last week.
“Some of the competitors, certainly in Europe, are getting out of certain businesses that we’re in,” Viniar said. “That leads to reduced capacity and more opportunities, better bid- offer spreads, more rational pricing. It feels like it’s -- I don’t like to use the word permanent, because everything changes over time -- but more permanent than we’ve seen in the past.”
U.S. banks’ share of the total reported by the nine largest investment banks rose to 66 percent from 56 percent a year earlier and 60 percent in the third quarter. The increase occurred as revenue from trading stocks, bonds and derivatives at the five U.S. banks -- JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America Corp. -- fell for the sixth time in the past seven quarters.
Investment banks in Europe have been aggressive in shrinking risk-weighted assets and shutting units. Deutsche Bank AG brought its trading risk down to the lowest since 2003, while Zurich-based Credit Suisse Group AG took a charge of 469 million Swiss francs ($512 million) to cut assets and exit some fixed- income trading businesses.
“There are some trends being seen across a lot of different competitors and across a number of business lines, which if they play out the way it looks so far, could help the U.S. capital-markets banks in terms of market share,” said Guy Moszkowski, an analyst at Bank of America in New York.
U.S. banks’ gain in trading-revenue share represents a bigger slice of a shrinking pie. It also shows how the European debt crisis is reshaping the banking landscape as lenders sell businesses and seek to assure investors their funding is stable.
Trading Decline
The nine firms that reported the highest trading revenue in 2010 -- the group also includes Barclays Plc, Deutsche Bank, UBS AG and Credit Suisse -- posted a 28 percent decline in the fourth quarter, to $19.9 billion, from the same period a year earlier. That’s less than half the $52 billion the banks reported in the first three months of 2010. Trading revenue for all of last year fell 16 percent.
The figures exclude the effect of accounting gains and losses tied to the banks’ own credit spreads, known as debt- valuation adjustments, or DVA.
The global revenue pool for fixed income may decline about 10 percent this year because of weaker customer activity, continued challenging trading conditions and regulatory pressures, Kinner Lakhani, a Citigroup analyst in London, said in a Jan. 25 note. Equity and primary revenues are expected to show “modest growth,” the report said.
“The 2012 outlook remains challenging not least because we expect the sovereign crisis impact to ‘spill over’ into the first quarter,” Lakhani wrote.
Credit Suisse, Barclays
Credit Suisse posted a loss before operating expenses from fixed-income trading in the fourth quarter, and Deutsche Bank and London-based Barclays each reported overall trading-revenue declines of more than 33 percent from a year earlier. Citigroup, based in New York, was the only U.S. bank to have that large a falloff, while Morgan Stanley was the only one of the nine firms to show an increase.
For the full year, European banks maintained the same 39 percent share of trading revenue they had in 2010. The fourth- quarter drop came from some one-time charges to exit businesses and a greater reliance on the European market, which faced a bigger decline in prices and volumes, according to Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets.
“European fixed-income trading was under a lot of pressure because of the sovereign-debt crisis,” Becker said in an interview. “I don’t think the market-share losses will remain forever. It was just the fourth quarter. The market has settled in the first quarter.”
Cheap Money
The European Central Bank in December flooded the banking system with cheap money to avert a credit crunch. Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion euros ($645 billion) of three-year, 1 percent loans from the Frankfurt-based ECB at an auction. The European banks among the nine biggest trading firms said they didn’t borrow from the ECB.
Shares of the four are up 18 percent this year after falling an average of 32 percent in 2011. The five U.S. banks have gained an average of 29 percent after dropping 43 percent last year.
Still, European banks are facing head winds. The euro- region economy is expected to shrink 0.5 percent this year, while the U.S. may expand 2.2 percent, according to data compiled by Bloomberg. Regulators in Switzerland also are holding their banks to higher capital ratios than U.S. lenders are expected to face under rules approved by the Basel Committee on Banking Supervision, forcing them to shrink assets.
“One reason for the poorer trading performance by European banks is they cut back risk and have to reach higher capital levels,” said Georg Kanders, an analyst at Dusseldorf, Germany- based WestLB AG who has “buy” ratings on Deutsche Bank and Credit Suisse and a “neutral” on UBS.
Reducing Risk
Credit Suisse’s investment bank cut its risk-weighted assets as defined under Basel III rules by $47 billion in the fourth quarter and plans to trim an additional $33 billion in the first quarter, reaching the level targeted for the end of this year nine months early, the bank said last week. The risk reductions and charges for job cuts cost the bank 981 million francs in the period.
UBS’s investment bank shrank risk-weighted assets by about 26 billion francs in the fourth quarter. Of that, about 8 billion francs were in “core” businesses at the investment bank and were a result of “lower market risk in our trading book,” Chief Financial Officer Tom Naratil told journalists and analysts in Zurich last week.
‘Resizing’ Businesses
“The Swiss banks are responding to the higher capital requirement by resizing the trading business fairly dramatically,” said Moszkowski of Charlotte, North Carolina- based Bank of America. “The U.S. banks have regulatory issues as well. It’s really going to be a question of degree.”
European banks cut risk in the fourth quarter as Italy changed prime ministers, Portugal’s debt rating was cut to junk by Fitch Ratings and Greece struggled to reach an agreement with bondholders on a deal to restructure its debt.
Deutsche Bank cut its average value at risk at its corporate and investment-banking unit to 56 million euros in the quarter, the lowest since at least 2003, company reports show. The bank’s value at risk, or VaR, is a measure of how much it could lose in trading in one day, with a 99 percent probability.
The bank will increase its VaR since that level isn’t sustainable, according to CFO Stefan Krause.
“We made a conscious decision in the fourth quarter of last year to really reduce risk,” Krause told analysts on a Feb. 2 conference call. “It did not impact our January results, as far as I can see from this seat right now at all, because the results are quite good and therefore not a concern at this point.”
Reversal of Fortune
Value at risk at UBS’s investment bank fell to 36 million francs in the fourth quarter, the lowest level in at least three years. While the Zurich-based firm may increase VaR in the coming quarters, it won’t be a “major” increase, Chief Executive Officer Sergio Ermotti, 51, said last week.
The gains by U.S. banks are a reversal of the advances European lenders made in 2008 and 2009, when U.S. firms were going through a credit crisis and recapitalization, according to Morgan Stanley CFO Ruth Porat. U.S. banks including Merrill Lynch & Co. and Bear Stearns Cos. generated a revenue share of about 65 percent in 2006. That fell to 61 percent by 2010.
European banks, excluding lenders in Greece and those in the midst of restructuring, plan to boost capital by about 98 billion euros, 26 percent more than regulators originally required, the European Banking Authority said last week.
U.S. Opportunity
“In 2008, European banks took share from U.S. banks, and that’s obviously when this country was going through its capital raise focus and liquidity raise,” Porat said on a conference call with analysts last month. “Given that European banks are now going through similar issues, we do see this as an opportunity to gain share.”
Morgan Stanley, based in New York, gained 6 percentage points of trading-revenue market share, the largest year-over- year increase in the fourth quarter of any of the nine banks. Barclays and Credit Suisse lost the most, with each falling 5 percentage points.
Some U.S. banks don’t see the pendulum swinging back to Europe anytime soon. Goldman Sachs CFO David Viniar listed “market-share opportunities in Europe” as one of the New York- based firm’s long-term areas of growth at an investor conference in Miami last week.
“Some of the competitors, certainly in Europe, are getting out of certain businesses that we’re in,” Viniar said. “That leads to reduced capacity and more opportunities, better bid- offer spreads, more rational pricing. It feels like it’s -- I don’t like to use the word permanent, because everything changes over time -- but more permanent than we’ve seen in the past.”
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