Despite the economic difficulties of 2020 and likely uncertainties of 2021, analysis from Moody’s suggests the world’s largest investment banks are well positioned to handle financial challenges in the coming year.
Moody’s Investors Service’s 2021 industry outlook for global investment banks (GIBs) found that the sector will begin 2021 in a stronger position than many other parts of the economy due to diversified business models, as well as solid capital levels and liquidity reserves.
For example, when comparing 2006 (ahead of the global financial crisis) with 2019 (ahead of Covid-19 disruption), GIBs had substantially higher Tier 1 capital as a proportion of risk-weighted assets. At an aggregate level across GIBs, the proportion increased from about 10% in 2006 to about 15% in 2019.
Capital markets have been a particular area of strength for banks this year. The report suggests GIBs earned around a full year’s worth of revenue during the first nine months of 2020. Across all 13 GIBs in the Moody’s analysis, total capital markets revenue at the end of the third quarter of 2020 stood at $162bn, with more than half of that total ($86bn) coming from fixed income, currencies and commodities activity. Revenue across the GIBs reached the same total for just the first nine months of 2020, as it did for the whole of 2018, and was higher than revenue for all of 2019.
While this same level of activity is not expected to continue in 2021, capital markets is expected to remain a significant revenue driver. Recovering merger and acquisition markets are also expected to boost 2021 results for the GIBs.
Nonetheless, GIBs will still be hampered by low interest rates, with net interest margins (NIMs) continuing to face difficulties. While European banks have been operating in a tough rate environment for several years (the UK excepted, to a certain extent), US universal banks Citi, JPMorgan and Bank of America were particularly affected by the Federal Reserve’s drastic rate cuts in March. NIMs fell at Citi, from above 2.5% in 2019 to below 2.25% in the first half of 2020, 2.25% to 2% at JPMorgan and 2.25% to under 2% at Bank of America.
Continued coronavirus uncertainty could also pose challenges in the coming year, but this is expected to be mitigated by governments in advanced economies continuing to provide high-level fiscal support and monetary policy remaining favourable. Although expected credit losses are likely to begin crystallising in the first half of 2021, levels of non-performing assets (NPAs) have remained relatively low so far. NPAs as a percentage of tangible common equity appear to have stayed flat or increased modestly compared with 2019 levels for most GIBs.
