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In the bleak mid-summer

It seems like a long bleak summer in the financial markets, as banks are reporting dire results.  It’s a combination of investment banking in the second quarter suffering serious damage across all fixed income desks, along with the Eurozone and American debt crises.

There is no certainty in such times.

For example, banks that usually do well are reporting red.  Goldmans Sachs led the way:

Goldman said its net income in the second quarter of 2011 was $1.05 billion, more than double the figure from the same period last year, but well below analysts' consensus forecasts.  Revenues were $7.28 billion, down 18 per cent from the second quarter of 2010 and 39 per cent lower than in January-March of this year, Goldman said. Analysts had projected revenues of $8.14 billion. Earnings per common share were $1.85, substantially below the consensus analyst forecast of $2.27.

But there is worse. 

After first quarter revenues at:

  • JP Morgan were down 1%;
  • Goldman Sachs was down 7%;
  • UBS investment bank was down 11%;
  • Credit Suisse was down 6%;
  • Barclays Capital was down 14%; and
  • Citigroup was down 25%;

now, in the second quarter, UBS are already in trouble:

UBS Chief Financial Officer John Cryan told analysts, "UBS faces weaker second quarter earnings after capital markets turbulence led to a sharp slowdown at its investment bank and lower activity by rich clients".

Result, they are laying off 5,000 staff whilst Goldmans are laying off 1,000, and several other banks are in trouble:

Credit Suisse is expected to suffer the steepest percentage fall in revenues from its fixed-income, currency and commodities division of the big four European investment banks, with Morgan Stanley forecasting a 41 per cent quarter-on-quarter decline.

A significant rise in mergers and acquisitions activity and underwriting of debt and equity issues will partially plug the gap for European banks, analysts said. Globally, investment banking fees were up 23 per cent year-on-year in the first half, and 26 per cent in Europe, according to Thomson Reuters.

Overall, investment banking revenues at Deutsche Bank, UBS and Credit Suisse will be down by an average of 25 per cent from the seasonally strong first quarter, while net profits are expected to have tumbled by an average of 49 per cent over the same period, according to analysts at Citigroup.

In the UK, investment banking revenues at Barclays and Royal Bank of Scotland Group revenues are expected to be down about 30 per cent from the first six months of 2010, with pre-tax profits falling a similar amount on average.

Meanwhile, there is still a crisis in retail banking due to non-performing loans, as evidenced by AIB’s results this morning:

Allied Irish Banks (AIB) unveiled a 2.6 billion euro($3.7 billion) underlying first-half loss as more loans turned bad, but said it expected 2011 to be the last year of major loan writedowns.

Alongside such news is the challenge banks are experiencing in capital raising in order to shore up their capital reserves to comply with the EBA stress tests announced a week last Friday.

The EBA data showed Europe's banks held €98.2 billion of Greek sovereign bonds at the end of December, with two-thirds of that held by Greece's banks, 9% by German banks and 8% by France's.

Banks' exposure to Irish sovereign debt was €52.7 billion (61% held domestically) and to Portugal it was 43.2 billion (63% held domestically).

This sovereign debt data has been crunched by analysts at big banks over the weekend in tests that were toughened up with default scenarios – something the EBA was barred from doing by nervous EU finance ministers.

Europe's banks would need €41 billion to keep their core capital ratio above 7%, the new global minimum from 2013 under the Basel III accord and already required by markets in practice, according to Reuters' calculations.

This compares with the 5% pass mark in the test.

JPMorgan's Abouhossein said a tougher test of 27 of the bigger banks using EBA data would show 20 are a combined €80 billion short of capital.

His test applied a haircut to sovereign bond holdings in the banking book and required banks hold core capital of 7%.

Credit Suisse analysts said applying larger haircuts on peripheral eurozone bond holdings, including for Italy, as per current market prices, would leave a €45 billion deficit for 49 banks it tested.

But capital raising isn’t simple, as the Bank of Ireland is about to find out

Bank of Ireland is trying to raise 1.9 billion euros ($2.7 billion) in a rights offering that closes on July 26 … the government will likely end up controlling as much as 65 percent.

So we have investment bank revenues and profits collapsing, retail banks still finding bad loans on their books, and Europe’s banks seriously challenged in shoring up their already crippled balance sheets.

Combine this with the who-will-chicken-out-first game in the USA over their debt crisis, and times aren’t great.

That's all past and present however.  

Looking forward, add on a few more jitters by thinking about a Q3 that is normally quiet, low M&A activity, more challenges in equities and fixed income, a euro crisis that rolls on and on and on, and you can see why I’m not a happy bunny.

These are a few of the thoughts I shared with Bloomberg this morning.

The only ray of light is JPMorgan and Deutsche Bank who consistently seem to over perform.

Will Deutsche continue to do that as their boardroom battle comes to a head?

Will JPMorgan be the last bank standing?


Postnote (26th July 2011, 08:29)

Times change fast.  After writing this yesterday, today Bank of Ireland have sold their rights issue to private investors and avoided state control and Deutsche Bank have confirmed their succession planning.

Bank of Ireland Sells Stake to Investors
Business Week

But, as expected, UBS report they are going to cut costs heavily in light of bleak trading conditions.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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