Which is the best area of an investment bank (broadly defined) to work in now? It's clearly not cash equities trading (just ask the equities sales and trading staff at Deutsche Bank). Nor is it the ever-shrinking fixed income currencies and commodities (FICC) trading division. Nor is it M&A (particularly not outside the Americas). It's transaction banking, and Bank of America's newly released second quarter results explain why.
In the second quarter of 2019, revenues in Bank of America's equities sales and trading business fell 13% compared to the same period a year earlier. In FICC, they were down 8%. In M&A they were down 6%. In DCM, they were down 12%. Only in equity capital markets did BofA experience big growth in its core investment bank in Q2 - and this was barely enough to offset the challenging first quarter.
In global transaction banking - the prosaic business of helping clients manage things like cash flows, working capital and supply chain and trade finance - however, Bank of America's revenues are up 8% in the first half of this year, and they were up 10% last year. Transaction banking is the new source of steady growth.
As the charts below show, Bank of America's shrinking sales and trading and investment banking revenues are the norm in 2019. With a few exceptions - M&A at Goldman, equity and debt capital markets (ECM and DCM) at Citi - traditional investment banking is a shrinking business. At BofA, M&A revenues are up 2% - but this is after some concerted investment to reinvigorate that business, in the context of which 2% growth doesn't seem that impressive after all...
Which leads us back to transaction banking and to the elevation of 39 year-old Stefan Hoops at Deutsche Bank. As head of Deutsche's transaction banking business, Hoops is the man of the moment in Deutsche's restructured future. "Our corporate bank...will be at the centre of Deutsche Bank," said Sewing last week. "- The corporate bank will be built around our transaction bank."
It's not just Deutsche and it's not just BofA. The transaction banking index from research firm Coalition puts industry-wide growth in the business at 9% last year, with an operating margin of 43% and a return on equity of 26%. These are numbers people in the 'core' investment bank can only dream of. Coalition puts BofA among the leaders in transaction banking in the Americas (with Citi and JPM). Goldman is already hurrying to build a cash management platform - this is the cash cow of the future.
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