Financial Services Ireland

The macroeconomic outlook: Improved profit for global banks in 1Q 2017

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The macroeconomic outlook: Improved profit for global banks in 1Q 2017

The Macro Economic Outlook

Financial performance in 1Q 2017 generally improved from 1Q 2016, however, results were somewhat flattered by the weakness that characterised the start of last year.

It’s a very positive set of results for the major global banks but mainly for those focused in the North American market and driven by wholesale revenue growth. European banks have to hope that this trend will spread to this side of the Atlantic and into retail revenues. Strength in the North American institutions may encourage them to look for new opportunities in the complex political and economic bloc that is the EU. We are still seeing plenty of progressive strategising for the post Brexit market, with Dublin naturally favoured by the North American institutions for their regulated EU entities. As usual we expect a ‘back to school’ re-energising of both domestic and international banks in Ireland in September.

Only four of the banks included in this analysis reported a decline in revenues from 1Q 2016:

  • American Express faced challenges from currency translation and the sale of the Costco portfolio.
  • Deutsche Bank’s €722m revenue decline reflected a negative impact from valuation adjustments.
  • At HSBC, reported revenue fell 13% from 1Q 2016. However, when adjusted to exclude significant items such as the 1Q 2016 benefits from the sale of Brazil operation and own credit spread, revenues actually grew 2%.
  • At Wells Fargo, fee income was impacted by a 23% drop in mortgage banking revenue.

Overall though, revenue growth was primarily driven by strong performance in fixed income trading, which benefited from a more constructive market environment and a surge in investor confidence following the US presidential election.

As Marcus Schenk, CFO of Deutsche Bank, reports, “The revenue outlook is broadly better than it was a year ago and that clearly has been reflected in market sentiment. The macroeconomic outlook has improved, reflecting an expectation of accelerated economic growth and likely increases in interest rates. Obviously, there is no certainty on this outlook and, in particular, there remains substantial geopolitical risk.”

Revenue trends were sufficiently positive to generate efficiency improvements at 21 banks. In addition, 23 banks reported positive operating leverage (revenues grew more than expenses). Higher revenues also contributed to better earnings performance, with ROE improvements at all but 7 banks and an increase in net income at 27 banks.

With strategic plans on-track and delivering and efficiency programs generating savings, banks are starting to shift their focus to transformational investments.

Cormac Murphy

Banking & Capital Markets, Sector Leader
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