The European half of the Q2 investment bank reporting season has wrapped up with the results from Barclays and Societe Generale today, and the news is – well, still bad, but not getting worse. Things could be summarised by the note in the Barclays results announcement that “variable compensation accruals […] were reduced in response to performance in Q1 19”. In other words, bonuses are down because the first quarter was terrible, but they don’t seem to have been reduced again in response to the second quarter performance.
The Q2 results have, in fact, shown something of a bounce-back for both banks. On a quarter-on-quarter sequential basis, Barclays was up 23% in investment banking fees, 10% in equities trading and 2% in FICC. SocGen saw equities trading recover by 16% and fixed income by 4%. It’s quite unusual for investment banking businesses to see this sort of seasonality; usually the first quarter is by far the biggest for revenues and it underlines the extent to which Q1 of 2019 was very weird.
It’s also noticeable that, having suffered much worse than their US peers in Q1, there has been some relative recovery for the EU banks. Versus Q2 of 2018, Barclays fixed income trading revenue was up 2% in sterling terms and down 2% in USD – this would have put it ahead of all its peers if it was an American bank. On an H1 basis, the comparison is even more striking as Barclays’ FICC revenue was up 14% compared to falls for most of Wall Street. Even the equities revenues – down 13% on Q2 18 and 17% for the half – are by no means disgraceful, in line with Citi and Bank of America.
Even SocGen, despite a significant restructuring program with large potential redundancies, managed a reasonable performance. It was down 10% in equities and 6.6% in fixed income trading revenues, while advisory and financing was up 2.6% on Q2 18 (and up 10% for H1 19). Seemingly, SocGen bankers and traders are more phlegmatic about the prospect of impending doom than their counterparts at Deutsche, which blamed a terrible quarter on the effect of their own strategic change.
In fact, it’s hard to see why anyone would be enthusiastic to cut these businesses. The cost/income ratios are high, but basically stable. On an “as if” basis, adding together SocGen’s markets and advisory reporting (and adjusting for restructuring costs), we estimate the efficiency ratio went from 80% in H1 18 to 81% this year – and the divisional returns on equity are tantalisingly close to double digit (9.3% for Barclays Corporate & Investment Bank, 10% for SocGen Global Banking & Investor Solutions). As a lowest common denominator, rock-bottom-of-the-cycle performance, that’s not so bad.
But have we hit rock bottom? Unfortunately, the whacky seasonality caused by the Q1 revenue shock makes it hard to tell. The second half is generally an uphill struggle, with the summer holiday lull and the dead period at the year-end. But there are still plenty of transactions in the pipeline, delayed by investor risk aversion but which can’t be postponed forever. And there is certainly some prospect of a return to more normal levels of volatility and trading activity. It looks like there’s some prospect of recovery, and that although 2019 is still highly unlikely to be anything other than a very bad bonus year, there’s some hope it might not be the outright disaster it appeared to be a few months ago.
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