Wall Street's Q1 results: Everyone’s a winner?
There was virtual dancing on Wall Street after investment banks unveiled their first quarter results.
Wall Street's leaders are dancing again
Goldman Sachs boosted its risk taking and delivered its strongest performance in four years. Morgan Stanley kept its risk at the same level but still announced numbers that were its best since before the financial crisis. JPMorgan touted an increase in investment banking fee market share of 1%.
Before joy becomes unconfined, it is worth reflecting that one decent quarter cannot provide an endorsement of a series of contrasting business models.
And there is a risk that a Goldilocks quarter for trading businesses – some volatility, but not too much, with core equity and debt markets rising – will provide temporary cover for deeply unconvincing restructuring plans from firms led by Deutsche Bank and Credit Suisse.
An increase in fixed income revenues of 9% compared to the same quarter last year and a rise of 31% in equities certainly marked an improvement for Deutsche. But profit fell due to a $2.5 billion fine for persistent rates setting abuses, a record for any bank, while key capital measures weakened during the quarter.
There is a risk that a Goldilocks quarter for trading businesses will provide temporary cover for deeply unconvincing restructuring plans from firms led by Deutsche Bank and Credit Suisse
Deutsche also said that it intends to cut balance sheet deployment in some of the businesses that underpinned the first quarter revenue recovery – such as prime broking within its equities group and rates trading within fixed income.
Deutsche co-CEO Anshu Jain maintained that the firm can cut its investment banking leverage by asset reduction of a net €130 billion to €150 billion while maintaining or increasing its share of key markets, and also pledged to deliver €3.5 billion of additional cost savings.
Little detail of how this will work in practice was provided and stock analysts were unusually strident in voicing scepticism about the plan in a conference call on April 27.
Deutsche’s stock fell sharply after the call, indicating that the power of magical thinking may be on the wane when it comes to convincing outsiders that the firm’s various strategy shifts will deliver a meaningful return on equity in the near to medium term.
The three leading US investment banks are in better shape, and their first quarter results prompted characteristic public reactions from their senior executives. Goldman made sure to stress its relative outperformance to the peer group and the near-term vindication of a decision to maintain full-scale debt and equity trading businesses.
Goldman has learned its post-crisis communications discipline lessons well – don’t expect to ever see another dodgy email trail from this firm – and any gloating is done in private nowadays.
Morgan Stanley CEO James Gorman fairly oozed self-satisfaction on his quarterly earnings call, by contrast. He congratulated himself on the firm’s business mix and turned the call into a farewell party for departing CFO Ruth Porat, who is leaving to take the same role at Google.
In delivering JPMorgan’s results, CEO Jamie Dimon and CFO Marianne Lake continued their defence of the bank’s business model. Some Goldman stock analysts started this year with a sly dig at JPMorgan by arguing that it would be worth more if it was broken into its component parts, and Dimon appears to have been stewing in anger ever since.
Goldman may have been slightly counterproductive and done defenders of the universal banking model a favour by attacking JPMorgan, the biggest and most successful example of the breed.
JPMorgan can provide some substantial numbers to back its contention that its different business lines provide cross-selling synergies and efficiencies. At an investor day in February, JPMorgan claimed $15 billion of annual cross-selling synergies and $3 billion of cost savings from its diversity, leading to a $6 billion to $7 billion impact on net income.
These are hefty amounts, even allowing for some exaggeration.
Morgan Stanley, for all its recent stock price appreciation and revenue revival, is not nearly as secure. And Gorman’s boast on the recent earnings call that the firm has won back the prime broking business it lost after the credit crisis and actually increased market share casts some doubt on his commitment to ruthless pruning of capital-consuming activities. Perhaps even a cold-blooded management consultant can develop an attachment to businesses that have an element of glamour (at least by banking standards) such as serving the biggest hedge funds.
Any issues Morgan Stanley has with illogical attachment to investment banking business lines are dwarfed by the problems facing Deutsche Bank and Credit Suisse, however. These two firms are probably the source of much of the regained prime-broking market share by Morgan Stanley that Gorman touted. That at least indicates that Deutsche and Credit Suisse are cutting some exposure in businesses where returns are too low to justify heavy balance sheet consumption.
But the records of the two banks do not inspire confidence that they will successfully execute broader plans to adapt their business models to future market needs.
Credit Suisse at least now has a chance to make a clean strategic shift, as veteran CEO Brady Dougan is replaced by an outsider in former Prudential CEO Tidjane Thiam.
Deutsche, by contrast, is stuck with a management team that is forced to spend much of its time justifying policy reversals and battling to maintain credibility for its most basic cost and revenue projections.