With Deutsche Bank AG, BNP Paribas SA and UBS Group AG reported strong fourth quarter trading income earlier in February, others European investment banks such as Credit Suisse Group AG, Barclays PLC and HSBC Holdings PLC are also expected to end the 2020 business year on a positive note.
Market volatility and central bank measures triggered by the COVID-19 pandemic have turned trading income from a weak point to a positive one in the earnings of major European investment banks in 2020. Despite a slowdown in the volatility towards year-end trading revenue growth most banks that have already released annual results were in line with the expectations and average performance of their US peers, analysts said.
European banks that have yet to report are expected to report “healthy” year-over-year revenue growth in the fourth quarter of 2020, as the market environment remained favorable during the quarter, Richard Barnes, Senior Director of S&P Global Ratings’ the financial institutions team, said in a written comment. Credit stood out in fixed-income, currency and commodity trading and on the equity side there were favorable market drivers in both cash and derivatives, according to Barnes.
Deutsche, UBS, BNP results
Trading revenues for the full year 2020 for German group Deutsche Bank and Swiss company UBS were closer to the US average, while revenues for French company BNP Paribas like those of compatriot bank Société General SA, were affected by losses on structured equity products in the first half of the year, Barnes said.
After suffering “hard losses” on structured financial products, French banks are experimentingsaw a strong rally in equity trading in the fourth quarter, Johann Scholtz, an equity analyst at investment research and management firm Morningstar, said in an email. Despite a “dramatic slowdown” in the fourth quarter as COVID-19-induced volatility moderated, according to Scholtz, FICC trading has consistently dominated revenue growth.
Weakness in BNP Paribas shares resulted in a 41.91% year-over-year drop in 2020 revenue in this industry, but a 58.61% increase in the FICC was able to fully offset this negative effect, according to data from S&P Global Market Intelligence. Despite its overweighting in equities, UBS recorded a stronger growth rate, 68.78% year on year, in FICC, which was the main driver of revenue growth for many global investment banks in 2020. After having discontinued its share sales and trading activities as part of a long-term restructuring, Deutsche Bank’s trading income comes solely from its interest rate and currency activities, where the German group recorded an increase of 28.29% of its revenues year-on-year.
Compared to their US counterparts, the three European banks had higher full-year trading revenue growth than Bank of America Corp., while the growth rates of UBS and Deutsche Bank were also higher than those of Bank of America Corp. of Citigroup Inc. in 2020. In FICC, UBS posted the highest year-over-year revenue increase among banks that have reported so far.
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Outlook for Credit Suisse, Barclays, HSBC
Given that UBS, Deutsche Bank and BNP Paribas recorded year-over-year increases of 21%, 17% and 11.8% in their revenues in the fourth quarter, it is expected that this will be more for the Credit Suisse and the rest of the European investment banks due to report soon, although trading income may be affected by company-specific issues, Scholtz said.
Credit Suisse, in its report on February 18, is expected to post fourth-quarter trading income of 1.34 billion francs, slightly below the third-quarter result of 1.38 billion francs, according to an average forecast of CHF 1.38 billion. ‘consensus analysts released by the bank. The group’s full-year trading revenues are expected to be 6.58 billion Swiss francs, compared to 5.35 billion Swiss francs in 2019.
Swiss credit strong trade exposure will bolster its overall profits for 2020, making it a much better performer than Barclays or HSBC, which may benefit from a boost from their trading desks but are likely to suffer from the weak economy Briton Octavio Marenzi, CEO of capital markets management consultancy Opimas told S&P Global Market Intelligence.
Barclays, which will report its results on February 18, is expected to post fourth-quarter total income of £ 2.55 billion in its corporate and investment banking division, or CIB, from £ 2.91 billion in the third. quarter 2020, an average consensus analysts forecast on its website show. CIB’s annual revenue is expected to be some £ 12.39 billion, or over £ 10.23 billion in 2019. Trading revenue accounts for more than half of the bank’s total CIB revenue.
HSBC’s consensus report does not specify global markets or investment bank income forecasts, but overall income for 2020 is expected to be slightly lower than a year ago. “We see [a] Single digit average percentage revenue decline for HSBC in 2020 as we see headwinds due to the low interest rate environment and reduced demand for banking services in the middle [the] COVID-19 pandemic, “CFRA equity analyst Firdaus Ibrahim said in a February 13 note.
Low interest rates and high loan loss provisions amid COVID-19 weighed on the UK-based group’s revenues in 2020, with global markets one of the only bright spots in its profits. The group’s total adjusted revenue fell 10% year-over-year in the third quarter, while global markets revenue grew 16%, mainly driven by strong results from FICC. HSBC reports on February 23.