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A tale of 2 banks or 2 Country-blocs (US & EU). US banks have managed Regulatory Capital well, reinvested in technology for scale in volatile trading, reined in bonuses and benefit from an un-fractured Retail market with +ve interest rates...1/2...
On the other hand, EU banks have overstated synergy of I-Banking with Corporate Banking, without steady revenues from either, frittered away capital & drove margins to 1-digit RoE levels. All this while facing -ve interest rates & fractured, price-protected Retail markets...2/3
...EU banks, barring ~2, have also failed to capture scale & synergy of Wealth Management with I-Banking, neither focusing on Retail Brokerage Tech (like $MS or $SCHW) or PWM hi-touch (like $C). Wrong focus, delayed timing...3/3!
Phew, I got the FAQs on “why did one Bank exit Trading and should all large banks be following suit?” off my chest, good night!
Neither focusing on xx..Nor on yy (apologies for bad grammar!)
Addendum 4/n: Structurally, Banking is a very fragmented industry vs. other capital intensive ones (e.g. Telco, Airlines).This results in “asymmetry” of risk-return; largest banks face fragmented markets & hence sub-optimal profits, while risks tend to be concentrated in #GSIBs.
5/n: Lets talk fragmentation: Deposit share of 2 largest US banks is a mere~10% each (Regulation apart). A global PWM bank with ~$1Bn AUM is possibly 10th in rank. Largest Transaction bank ~<5% wallet share of Corporates. 10 largest I-Banks trend a declining share of IPO fees...
6/n: Risk-capital (and by deduction, market capitalization & assets) on the other hand is concentrated: e.g., top 10 US banks’ market cap is ~ 5X the rest 90 combined! China’s top 4 banks have assets > 100% of the country’s GDP!
7/n: Large global banks are challenged to find a sustainable path to RoE; above situation forces increased complexity, driving larger Ops & Tech costs, that tend to be sticky QoQ, while incomes are volatile & trend downwards quickly with a flattening or inverted yield curve.
8/n: Additionally, the largest global banks (Esp. EU) have lower revenues per-capita of Risk Weighted Assets (poorer RWA leverage) due to ⬆️competition (traditional & Open Banking Fintechs)+low inflation & interest rates. So Cost-Income ratios and Revenue/ RWA are a pincer grip!
9/n: As an aside, cost-cut announcements often lead to permanent revenue reductions which happen quickly as customers churn away due to uncertainty, but the cost cuts themselves may-be phased-in over multiple years. That leads to an immediate cost-income ratio erosion!
9/n: Large banks can break out of the pincer through 2 means: Harness the 3C technologies - Cloud, Cognitive, (Block-)Chain- to bend the Ops&Tech cost curve non-linearly with revenues + use those tech to access steady-growth revenue streams and unlock higher profit pools within.
10/n: No means prescriptive, not a secret sauce (why should I anyway give up my secret sauce here?!), just a collating of seemingly random thoughts! Any resemblance to specific banks’ strategy is coincidental and unintentional! Views are personal and do not reflect my employer’s!
I recommend using @threadreaderapp to “unroll” the above thread, but I can’t guarantee the coherence! This was composed entirely under the influence of jet-lag. No bankers were harmed in the production of such tweets 😂.
Sorry typo above & a nuance: Pls read as “global PWM bank with $1 trillion (not $1 Billion-Bn) AUM”. This actually is the total Assets Under Administration, including actively managed as well as client assets+ cash under custody. $1 trillion would still be about #10 in rank.
