Dropping yields give investors cold feet

06 sep. 2019 English Section
ADELINA TOADER, EMILIA OLESCU (translated by Cosmin Ghidoveanu)
Dropping yields give investors cold feet

Revenues of the biggest investment banks in the world have been dropping constantly, reaching a 13-year low in the first half of 2019. According to Financial Times, this drop came as a result of the geopolitical tensions, the slowing growth and low interest rates, which have formed a structural decline which occurred after the financial crisis.

The 12 biggest investment banks in the US and Europe have generated 76.8 billion dollars in income from trading and consultancy, down 11% over 2018.

Christian Bolu, banking analyst at Autonom, said that investment banks had mixed results in the third quarter.

Romania doesn't have actual investment banks, even though domestic banks do perform some of the typical investment bank activities, said economic analyst Aurelian Dochia.

He explained that in Romania there are brokerage firms which trade in the markets, there consultancy services for the merger-acquisitions operations, etc., but they are not bundled together into specialized entities.

"For Romania it is probably enough, because it is a small market, not very sophisticated, there aren't enough instruments and thus I think that what is available meets the market's needs. Moreover, for the real big and important transactions - for instance, if the Ministry of Public Finance decided to issue on the international market a bonds issue of one billion Euros - it is clear that a major bank, from Goldman Sachs to any other bank, will be present and try to get a mandate for that transaction".

Among other things, Aurelian Dochia points out that the drop in investment bank revenues shows a low appetite for risks from businesspeople. The economist also points out that there is concern among investors, and the Romanian business sector cannot be decoupled from what is happening abroad: "All the information that is circulating is making businesspeople be very careful about their investment plans. Even if the cycle of the Romanian market may be off by a few months compared to the foreign market - especially the European one -, until those news start circulating in Romania some operations may have a shade of optimism. In my opinion, that sentiment will spread everywhere, now, in the last part of 2019. Just by looking at Germany, which is our main business partner, we realize that we can't exactly be very optimistic.

Romania has had a very good situation, in the last few years, and so I think that the investments that were made here after 2010 have gone well, but investors aren't so much looking backwards but forwards. Even if so far they have been successful, to them the best strategy is to sit and wait to see which way they should go".

Everybody has money and nobody is making investments, says Cristian Pârvan, secretary general of the Romanian Association of Businessmen (AOAR), who explained: "For now, it's only worth investing in niche sectors, such as IT or real estate - areas which have an attractive enough profit margin. The time it takes to make a profit varies from sector to sector, because there are industries which seek to recoup their investment quickly, such as technology, in general, where, due to the niches they exploit, the returns are very high. But it is hard now to make investments, for instance in chemistry, metallurgy or even machinery.

When speaking about the time to recoup the investments, we need to take into consideration the updated value of money".

Mr. Pârvan also told us that the dollar ten years ago was worth a lot more than it is today. Christine Lagarde says that she will continue the quantitative easing policy of her predecessor, meaning the policy of cheap money, because they do not have a justification for raising the rates".

Yields, which mean how much an investment produces, have dropped significantly over the last few years, given the interest which are very low, sometimes even going into negative territory, said Adrian Codirlaşu, the president of the CFA. "Truth be told, it varies from one investment to the next. For instance, a company can borrow far cheaper to make investments, and it is possible for many investments to actually be profitable due to the low interest rates.

Investments can be financial in nature - but the interest rates are very low, on a global level - or they can take the form of stock purchases, which can lead to good returns.

Thus the yields vary - for those who have money to invest in Euros or the major currencies, they are extremely low, for those who borrow to make investments, it's a good thing, because they borrow more cheaply".

Banks have individually reported weak earnings in the second quarter of 2019, from the investment segments, including an 18% drop in fixed income for Morgan Stanley and a 32% drop from shares at Deutsche Bank, which is in the process of shutting down its stock trading activity, according to the quoted study.

As part of the group, the most visible drop was in stocks, where revenues dropped 17% across all regions, due to the significant drop in the demand for derivatives and primary brokerage, lending and trading for hedge funds.

European Mifid II norms concerning investor protection have also made stock trading more difficult, leading to speculation that other European banks may follow in the footsteps of Deutsche Bank, leaving stock trading to Wall Street banks.

Fixed income and commodities trading also slumped in the first semester, going down 9%, partly because of the low interest rates, whereas M&A consulting and capital markets revenues decreased 8%, because cautious companies have sold fewer bonds, and stock listings stagnated.

The volume of shares has increased 5% a year in the US and saw double digit drops elsewhere, whereas fixed income volumes have increased YOY by 6% globally. Investment bank revenues decreased 11%.

Investment banks, particularly on the smaller and more fragmented European markets, are under increasing pressure from investors, because their profitability is dropping amid the greater capital requirements, the increase in digitization and the ultra-low or negative interest rates.

On average, stocks of European banks have seen two figure drops every year since 2016, with some of the biggest drops being seen in those who have maintained trading operations.

The two biggest banks in France, BNP Paribas and Societe Generale, have cut their financial goals this year and have announced that they would cut their costs by 850 million Euros and cut thousands of jobs from their investment banks, after a string of weak results.

Barclays, led by former JPMorgan executive Jes Staley, is the last European bank which tries to compete as a global "bulge-bracket" player (ed. note: the biggest and most profitable multinational investment banks). However, Jes Staley spent last year battling an important activist investor, who is demanding the radical downsizing of Barclays investment bank.

American banks are also under pressure, Financial Times notes. Citi has cut hundreds of thousands of jobs from its trading division, in response to the difficult market conditions, whereas Goldman Sachs promised a step towards changing profitability from the trading of fixed income instruments as part of a strategic plan which will be revealed in January.

The number of front-office employees has dropped for the tenth year in a row, by 3% a year, to 50.400 down from 56,700 in 2014. Nevertheless, "the total reduction of spending could not compensate for the drop in revenues", according to Coalition.

The predictions on profitability, an essential indicator of profitability, will drop on average by 6.7% this year, from 9.5% in 2016. The operating margins have decreased to a four-year low.

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