39
Stock-trading desks at
big banks have been
enjoying their best
year in a decade.
- WSJ
Overall U.S. banking industry earned a record
$48.3 billion during the second quarter, … Well
above the pre-crisis high of $38 billion . - CNN
“I am pleased first of all that we had
two consecutive quarters where we
reached a return on tangible equity
above 15%," - CEO UBS
Wealth & Investment
Management booked a
2017 Return on Equity of
21% - Wells Fargo.
Jefferies Group LLC's
second quarter results were
strong. - JEF 8-K.
We expect 2018 revenues
to be higher by +8% on
average. This will be driven
by strength in equity
trading, investment
banking, and rate-based
revenues. – Merrill Lynch
Research
Big commercial banks are
expected to post a stellar
quarter in terms of profits.
US Securities Industry - Net Revenue.
Source: SIFMA Database
US Securities Industry - Expense and Revenue Trends.
40%
60%
80%
100%
120%
140%
160%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Revenue Compensation Other Expense
Source; SIFMA Database.
Compensation and Headcount.
Compensation to Net Rev. Front Office Headcount
Source: SIFMA Database.Source: SIFMA Database.
Broker Dealer Leverage has Declined.
Source; SIFMA Database.
US Securities Industry Total Assets.
Source: SIFMA Database.
G-SIB Basel III Capital has Improved.
Source: Moody’s.
The Capital Base has Strengthened.
10/15/2018 9
Source: Moody’s.
Liquidity Improvement.
10/15/2018 10Source: Moody’s
Industry CDS Spread.
Source: Bloomberg
Challenges…
Revenue Yield on Global Financial Assets.
10/15/2018 13Source; Data from McKinsey Deutsche Bank Research, World Bank and Coalition. Hintz Computation.
0.000%
0.010%
0.020%
0.030%
0.040%
0.050%
0.060%
0.070%
0.080%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E CAGR
Rev. of Top 10 Banks
from Coalition ($Bln) $ 182.2 $ 110.6 $ 163.3 $ 186.0 $ 158.7 $ 175.5 $ 167.1 $ 164.6 $ 160.2 $ 156.1 $ 150.4 -1.90%
Global Financial
Assets ($Tln) $ 243.0 $ 221.0 $ 243.0 $ 259.0 $ 261.0 $ 272.0 $ 285.0 $ 294.0 $ 300.0 $ 306.6 $ 317.4 2.71%
Yld. on Global
Financial Asset 0.075% 0.050% 0.067% 0.072% 0.061% 0.065% 0.059% 0.056% 0.053% 0.051% 0.047%
Global Net Revenues from Capital Markets.
10/15/2018 14
Source: Coalition.
Few US Banks Achieve Satisfactory ROEs.
Source: Mergent Online (Univ of Arizona Library), Hintz CAPM Computation.
Cost of
Equity WFC GS MS BAC C JPM
2012 12.6% 12.7% 10.2% 0.1% 1.8% 4.1% 11.0%
2013 13.2% 13.4% 10.4% 4.6% 4.9% 7.0% 8.6%
2014 12.0% 13.0% 10.5% 5.1% 2.0% 3.5% 9.8%
2015 12.6% 12.1% 7.2% 8.4% 6.4% 8.0% 10.2%
2016 11.8% 11.2% 5.1% 7.9% 6.8% -3.2% 9.6%
2017 10.5% 10.5% 8.5% 8.0% 6.8% 6.6% 9.8%
9/30/2018 16
Global Capital Markets Banks - 2017 ROE and Cost of Equity..
Source: Data Moody’s and Mergent (Univ of Arizona Library).
US Securities Industry - ROE.
10/15/2018 17
Source: SIFMA Database.
Margins and Capital.
Capital Markets Margins.
10/15/2018 19
Industry
Segment
Margins
Calculated
Margins
Regulatory
Disclosure
FICC Trading 37.2% 24.9%
Equity Trading 28.2% 13.8%
Investment Bnk. 31.4% 25.0%
Total 33.3% 21.9% 15.2%
Large banks
claim these
margins.
Filings
show this
margin.
Statistics support
these margins.
A study of 15 broker dealers
found that one-third had over
25% of their cost base allocated
to corporate overhead.
Source: Coalition, SIFMA,
Sanford Bernstein and Hintz.
Capital Markets Pre Tax Profit Margins.
Sources: SIFMA Database, Sanford Bernstein and Hintz.
These margin estimates were determined by multiple regression of US security industry pre-
tax earnings versus six revenue sources over period 1990-2007.
Calculated Industry Margins.
60.0%
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
Mergers &
Acquisitions
Equity
Underwriting
Debt
Underwriting FICC Trading Equity Trading
Wealth
Management
Asset
Management
Trading margins are
improving
Segment Equity Usage.
10/15/2018 21
Source: SIFMA Database
$0.0
$20,000.0
$40,000.0
$60,000.0
$80,000.0
$100,000.0
$120,000.0
$140,000.0
$160,000.0
$180,000.0
$200,000.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Fixed Income Equity Wealth Mgnt Other
US Securities Industry Equity Capital Employed
Based on Asset Usage of Business Segments.
Equity Capital Employed.
Sources: SIFMA and Large Bank 10Ks.
But FICC is
shrinking its
capital use
Wealth Management.
Wealth Management
10/16/2018 24
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source; SIFMA Database
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Wirehouse Discount Other
Wealth Mgt. Net Revenues. Wealth Mgt. Client Assets.
Source; Aite Group.
Wealth Management Revenue Mix Change.
10/16/2018 25
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
2012 2013 2014 2015 2016 2017 $-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2012 2013 2014 2015 2016 2017
Net Int Other
Source: Company Disclosure.Source: Company Disclosure.
Big 3 Wirehouse Net Rev. Big 3 Wirehouse PT Margin.
Regional BDs
Investment Banking.
Domestic Investment Banking Net Revenues.
Source; SIFMA Database and LOB analysis.
US investment
banking has
rebounded
with the US
economy.
Global Investment Banking Revenue
Ne
t R
eve
nu
es
($
Bln
.)
Source: Coalition.
Global Investment
banking revenues
growth have been
slower in Europe
and Asia.
The Trading Businesses.
Domestic Fixed Income Net Revenues.
Source; SIFMA DataBase, Company Disclosure and Factiva
$, m
illio
ns
Reduction of Capital Intensive Assets.
10/15/2018 31Source; SIFMA DataBase and LOB analysis.
Illiquidity risk?
Customer Financing.
10/15/2018 32Source; SIFMA DataBase
Illiquidity risk?
Fixed Income ROE – With and Without Underwriting Revenue.
Source; SIFMA DataBase and LOB analysis.
Improving
Performance
Domestic Institutional Equities Net Revenues.
Source: SIFMA DataBase and LOB analysis
$ M
illio
ns
Institutional Equities Blended Commission Rate.
Source: MSIED, CSFB, Sanford Bernstein and Factiva.
Cen
ts P
er
Sh
are
$-
$0.0050
$0.0100
$0.0150
$0.0200
$0.0250
$0.0300
$0.0350
$0.0400
$0.0450
$0.0500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
The margin decline
in equity trading
predates the 2008
financial crisis
...
Equity Trade Volumes Daily Avg., Mils. of Shares.
Source; SIFMA
Institutional Equity ROE- With and Without Underwriting.
Source; SIFMA database, company disclosure and LOB analysis
Improving
Performance
Global GDP and Wealth is Growing.
Acceptable Returns on Capital.
• Wealth Management.
• Investment Banking.
• Asset Management.
Capital and Liquidity.
• Strong Capital Ratios.
• Improved Liquidity.
Regulation is Barrier to Entry.
Strong Internal Expense Control.
The Lay of the Land.
38
Decline in Cross Border Financial Flows.
Below Cost of Equity Returns.
• Fixed Income.
• Equity Sales and Trading.
Revenue Shift from Front Office to CCP,
Custodians and Exchanges.
Legacy Technology Systems.
Institutional Inertia Limits New Industry
Utilities and Outsourcing.
Institutional Investor View.
Institutional Investors are still not optimistic about the industry. A majority
believe that the large banks will be unable to beat their cost of capital in next
five years.
Investors believe that bank regulation will continue to tighten around the
globe and that new technologies will disrupt the banking, wealth management
and capital market.
Investors recognize that the banks have cut bank expenses and reduced
headcount. Low ROE is evidence that the industry’s efforts have been
insufficient.
Investors expect the number of bulge bracket banks and universal banks will
decline in the next five years. Source: Survey by Broadridge.
