The Covid-19 crisis has been a propitious environment for investment banks, with asset prices jumping up and down and companies and governments rushing to capital markets for liquidity and capital.
The five big US ones all duly posted strong full year increases in revenue, and their large European rivals are following suit.
Deutsche Bank turned a corner in 2020 as investment bank profits powered ahead of the losses from its capital release unit. BNP Paribas and UBS — the other two major players to release full results — also performed strongly. Barclays has not yet reported, but the increase in markets revenue appears to have reduced the scrutiny it faces over its investment bank.
The strong conditions appear to be in place for the time being, particularly as companies now look at M&A deals.
But what about those banks that have either cut or just never really expanded their investment banks? Is it worth diving into markets and origination services as a hedge against a recession and low rates? Probably not.
The strange picture of stellar capital markets activity in a soggy economy is unlikely to last too much longer. It could be prolonged if virus variants or something else causes a brief market panic and a forceful central bank reaction. But recovery and a slowing of the pace of activity looks more likely. For lending-focused banks, this recovery will hopefully be strong enough to ease corporate sector defaults and ultimately prompt a rise in interest rates.
What's more, scale remains important to compete in certain products, while diversification is useful in order to weather storms. This puts smaller banks at a disadvantage, and may for instance have helped BNP Paribas handle a meltdown of hedges related to dividends in the first half of last year.
Even at Deutsche and Barclays, questions over diversification may emerge later this year if trading activity slows, given the importance of the fixed income, currencies and commodities (FICC) business for revenues. FICC made up 29% of Deutsche's full year group revenues and 35% of Barclays' revenues for the first nine months of the year. However, Deutsche has suggested that much of its recent FICC revenue growth is sustainable, while Barclays said in its most recent results that it has grown market share here recently, rather than simply riding the wave.
All in all, the second tier of European investment banks do not look likely to beef up their corporate and investment banks beyond perhaps very targeted areas.
In the same week as Deutsche trumpeted its results, we found out that Commerzbank is looking at outsourcing equities sales and trading. It also said it would only support international corporate clients if they had "German connectivity" or operated "in selected lead sectors with significant future potential".
Equities revenues have been strong across the industry this year, while the international corporates line in Commerzbank's nine months results gained revenue year-on-year, unlike the other two segments of the corporate clients division, Mittselstand and "institutionals". Yet the bank believes it is better served twisting away from these areas.
Ultimately, many other banks are likely to agree with Commerzbank and conclude that while the coronavirus crisis has given their big rivals a large boon, there is not much of a path for smaller players to get in on the game.