Banks globally still have about $80 billion worth of deals to offload, and losses like the ones US banks have taken spell danger for European bank results, too. Ahead of second-quarter earnings, analysts at JPMorgan looked at likely exposures among banks based on their participation in unsold loans reported in the media. They put Bank of America as the lead player in these hung deals, followed by Barclays PLC. Hot on the heels of these two was Morgan Stanley, Citigroup, Deutsche Bank and Credit Suisse, in that order. Citigroup didn’t do so badly in the end — 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 next day.
Alastair Borthwick, Bank of America’s chief financial officer, said on Monday that the bank had no significant pipeline of further deals to underwrite, so it should be able to cut its exposures relatively quickly. JPMorgan has also been cutting risk and trying to reduce its market share since last year. That’s good news in some ways but also might reflect a downturn to come in dealmaking advisory fees. Some M&A bankers say that right now they are only signing on to new deals that are likely to clear off the books quickly and won’t have delays for regulatory or competition approvals.
M&A advisory fees have been one of the better areas for banks in the second quarter as deals negotiated earlier were announced or completed. But the collapse in fees for advising on share sales and debt issuance meant investment banking revenue overall was down about 50% across the board in the second quarter compared with the period a year earlier.
Bond and equities trading desks have done much better, taking advantage of the volatility and uncertainty that has beset investors. Goldman reported the best results in fixed-income, commodities and currencies trading, with revenue up 55% year over year in the second quarter; and second best behind JPMorgan in equities trading, with revenue up 11% year over year.
Part of Goldman’s secret is the growth in its financing businesses in equities and fixed income. The equities lending is to hedge funds, and Goldman’s revenue was up nearly 40% year over year in this prime brokerage, as it is known. Partly, Goldman has been taking market share from rivals, especially from those in Europe. Its gains also came despite the drop in stock markets, which cuts the value of hedge funds’ long positions. Citigroup, for example, reported a decline in prime brokerage balances in its business because of falling equity values last week. On the fixed income financing side, revenue was up 82% year over year. This business is driven by financing and repackaging loans made by other companies like mortgage brokers or fintechs. The bank said it also got a boost from repurchase (or repo) markets in the second quarter.
The total revenue of these two financing business has accelerated over the past two years for Goldman. The bank says that this is mostly market-share gains and that the revenue is more durable than its other trading. But with new mortgage lending and refinancing falling sharply across the US, stock markets still declining and many fintechs running out of growth, there’s a chance these revenue gains will also hit a wall over the rest of this year at least.
The lesson from second-quarter US bank results broadly has been that credit risks look mostly well contained. But if interest rates and financial markets don’t stabilize over the coming months, expect bank revenue in trading, investing and some forms of financing to slow down, perhaps significantly.
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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.
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