Sliding continued for transaction banking revenues
The transaction banking sector experienced a 2% decline in revenues for the 12 largest global corporate and investment banks during the first half of 2016, as reported by Coalition, an analytics firm specialising in the industry.
The reasons behind this decline are not explicitly stated in the available sources, but industry analysis from that period suggests several contributing factors.
Firstly, persistent low interest rates compressed net interest margins, reducing profitability in traditional transaction banking activities such as cash management and trade finance. This was particularly felt in Europe where the low-interest rate environment contributed to the decline in cash management revenue.
Secondly, weaker global trade volumes and cautious corporate spending led to lower demand for transaction banking services. This reduction in client activity was a significant factor in the decline, as businesses were less active in areas such as trade finance.
Thirdly, increased regulatory requirements and compliance costs reduced operational efficiency and pressured revenues. The banking sector has been grappling with a wave of new regulations, and these costs have become a burden for many institutions.
Fourthly, intense competition among banks led to pricing pressure, as corporates increasingly demanded better terms and lower fees. This has been a long-term trend in the industry, with banks constantly seeking to attract and retain clients by offering competitive pricing.
These factors, while not explicitly mentioned in the provided documents, are widely recognised as underlying causes for the decline in transaction banking revenues during that period. For more detailed information, one would need to refer to Coalition’s own research or financial industry reports from 2016, which are not accessible in the current search results.
In a statement to GTR, George Kuznetsov, an industry expert, explained that the drop in trade finance was significantly impacted by reduced volumes and volatility within commodities trading. He also predicted that higher interest rates in some regions may help improve cash management numbers in transaction banking.
Despite the decline, the trade finance side of transaction banking was not uniformly affected. Supply chain finance was the only area within trade finance with resilient performance. Some banks, such as Standard Chartered, are even making hires in transaction banking and trade sales to capitalise on opportunities in this area.
However, the drop in transaction banking earnings was not limited to this sector alone. The corporate investment banking (CIB) sector as a whole declined by 12% year on year, from US$118.5bn in the first half of 2015 to US$103.8bn in the first half of 2016. This decline was driven by a 20% drop in IBD revenue, a 18% reduction in equities revenue, an 11% decrease in FICC revenue, and a 5% decrease in securities services revenue.
The 12 banks being monitored by Coalition’s analytics company include Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Société Générale and UBS.
Interestingly, despite an increase in fossil fuel funding, major banks are announcing their support for ICC sustainable trade principles. This suggests a growing awareness and commitment towards sustainable and responsible business practices in the banking sector.
However, the outlook for the second half of 2016 remains uncertain, particularly on the trade finance side, due to upcoming events such as the US elections. As the industry navigates these challenges, it will be interesting to see how revenues evolve in the coming months.
Transaction banking's decline in revenues could be attributed to reduced demand for trade finance, caused by weaker global trade volumes and cautious corporate spending, as explained by industry analysis in 2016. Alternatively, sustainable trade might present an opportunity for banks to increase revenues, as shown by major banks' support for the ICC sustainable trade principles.
