Transaction banking: Transaction revenues stable but under pressure
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Transaction banking: Transaction revenues stable but under pressure

Competition and low rates eroding margins; Business key to broaden banking relationships

The third-quarter performance of transaction banking divisions shows how stable revenues and profits can be from the business. But this resilience is being tested by pressure points, not least competition.

Deutsche Bank’s global transaction banking (GTB) business delivered pre-tax profits of €379 million in the third quarter, slightly up on the same period last year, despite the challenges of a “difficult macroeconomic environment, low interest rates in core markets and competitive pressures on margins,” the bank said.

Deutsche’s profits came from €1 billion of net revenues in GTB – flat to the same period a year ago – supported by a 14% fall in non-interest expenses.

This performance was solid as opposed to stellar, but given that the group’s results were marred by €1.2 billion of litigation charges – slashing group pre-tax profits to €18 million – and hampered by an underperforming corporate banking and securities division, GTB might be seen as one of few bright spots in Deutsche’s third quarter.

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It was broadly a similar story for banks such as Citi, ING, Royal Bank of Scotland and Standard Chartered that break out the performance of their transaction services and related businesses. A range of pressure points are adversely affecting profitability, but revenue momentum is still largely being maintained.

Citi, for example, reported a 4% drop in third-quarter net income from its transaction services business – which combines treasury and trade solutions and securities and fund services – to $787 million compared with a year ago. Revenues of $2.6 billion were roughly flat to last year, but Citi said income was affected by “higher operating expenses, driven by volume growth, partially offset by lower credit costs”.

ING reported a 3% rise in pre-tax income to €141 million from its general lending and transaction services business, driven in part by falling risk costs, which, it said, “more than offset lower income, higher pension costs and IT investments”.

The Dutch bank said that margins in payment and cash management in particular “remained under pressure reflecting the low interest rate environment”.

Similarly, RBS’s cash management income fell 16% in the third quarter, reflecting what the bank said was a “decline in three-month Libor as well as increased funding costs of liquidity buffer requirements”. The cash management business fared better when compared with the second quarter of the year, with income up £12 million. Income from trade finance was also up by 8%, driven by loan growth, particularly in Asia.

Standard Chartered said that in both the year to September 30 and the third quarter alone income from its transaction banking business fell by a “mid-single-digit percentage” compared with a year earlier. Standard Chartered said that volumes across its cash and trade business, consistent with the first half, remain strong, and up by double-digit percentages both for the year to date and when compared with the third quarter of last year.

The bank said that “margins in the third quarter remain materially lower than in the equivalent quarter of 2012, with margins in trade now some 26 basis points lower, and margins in cash some 15 basis points lower”.

However, Standard Chartered said that margins in both trade and cash are now broadly stabilizing, potentially providing support to revenue and profits from a business that is increasingly being used to deepen banking relationships.

Managing a company’s cash management embeds a bank within its fabric in a way that all but ensures a long-term business relationship. “Banks may see it as a valuable entry point into a relationship,” says Nadine Lagarmitte, global head of payments and cash management for financial institutions at HSBC. “But there are challenges. You need scale to be globally competitive in this business, but the key is to be able to meet clients’ needs with solutions that are appropriate and suitable for them, and this varies across sectors.”


Kash Ahmad, managing director and head of UK cash origination at Barclays, adds: “There has been an evolution in the way both banks and clients view banking relationships.” Banks no longer only need to commit balance sheet to be seen as key partners, he says. There is a greater appreciation of the less capital intensive but equally important relationships and solutions provided by the transaction bank.

It isn’t only the banks that have changed their view of transaction banking. “Before the financial crisis, corporates didn’t focus as much on the availability of cash or counterparty risk exposures,” says Richard King, head of UK corporate banking and DCM at Bank of America Merrill Lynch. “Now these areas are seen as paramount, so the transaction-banking relationship is far more important to the treasurers and CFOs of our clients.”

Client priorities have changed, says Ahmad: “Where once the focus was entirely on yield, now there is a greater appreciation of additional factors, such as security and accessibility. If a client is looking to deposit money and the return is a few basis points less, that is one thing. But if there is a possibility of losing access to that money, then that has potentially more serious consequences.”

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