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Education Series: Single-Stock ETPs

Global Banks: A Path to Recovery

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Many retail investors find building a view on the banking sector particularly daunting: attribution of P&L drivers require acquiring a considerable amount of insight into the investment banking landscape. However, it’s not impossible for a shrewd investor to build a broad picture from the global economic landscape. In this article, we draw parallels between said landscape and some of the leading banks in the world today – HSBC (ticker: HSBC), Barclays (ticker: BCS), J.P. Morgan (ticker: JPM), Citi (ticker: C) and Goldman Sachs (ticker: GS).

European Banks: Gradual Improvement

Europe’s biggest bank by assets, HSBC, reported profit before tax of $8.78 billion for 2020, down from $13.35 billion a year earlier. The bank’s Hong Kong office accounted for $8.2 billion, while Mainland China and India contributed $2.61 billion and $1.02 billion respectively. This was offset by the bank’s losses due to higher expected credit losses and other credit impairment charges, and lower revenue, partly offset by a fall in operating expenses on a global level.

In 2020, Barclays faced the recessionary effects its corporate clients were experiencing and assisted their survival by helping raise funds on their behalf in the debt and equity markets. As a result, income from corporate and investment banking rose by 22% to £12.5bn, which – according to the bank’s management – made it the “best year ever”. Barclays went on to beat analysts’ consensus expectations by remaining profitable in every single quarter and posting a yearly profit before tax of £3.1bn, thus beating the FTSE 100 and all of its primary UK rivals.

However, analysts contend that the bank’s retail arm, which took a significant hit from lower margins and consumers taking on less credit while paying down debts since the onset of the pandemic, is a matter of concern and will likely face further headwinds in 2021.

Both banks have had to contend with the low interest rate environment – which had lowered interest rate-related income – and were forbidden from share buyback programmes in order to preserve capital in 2020. In 2021, HSBC has decided to virtually its shutter its Paris office and shift focus to Mainland China and India. Barclays, having beaten analysts’ estimates before, remain confident in staying ahead of the pack.

US Banks: Outperforming Expectations

Banks in the U.S. – possibly the worst-hit nation in the pandemic – were grimly prepared to take the full brunt of the pandemic. In December, they had $236.6 billion in total loan loss reserves in December, nearly double their level from before the coronavirus spread across the world. However, leading executives are reportedly quite comfortable: the economy – even during the pandemic – had outperformed banks’ internal forecasts.

In Q4 2020, relative to analyst’s survey estimates by Refinitiv, JP Morgan’s share price exceeded expectations by 45% at $3.79, with posted revenues exceeding expectations by 5% at $30.16 billion. Citigroup exceeded share price expectations by 55% at $2.08 while posted revenues were 1% lower than expectations at $16.5 billion. Goldman Sachs continued to lead the pack by exceeding share price expectations by 62% at $12.08 a share and revenue expectations by 85% at $11.74 billion. Interestingly, some of the cost savings came on account of lockdowns: banks reported billions in total were saved from their travel, entertainment and other such cost drivers.

Now in 2021, vaccine distribution is ramping up in the U.S. and a $1.9 trillion stimulus package was signed into law in the final week of March 2021. It’s thus likely that both U.S. consumers and businesses have dodged the worst-case financial scenario. U.S. banks are beginning to release a substantial portion of their loss reserves for circulation and their equities desks continue to outperform their fixed-income operations, as expected.

It also seemed that U.S. banks had been prudent lenders in their prime brokerage business. During the Archegos debacle, it was revealed that the brunt of the losses were absorbed by Credit Suisse and Nomura – at $4 billion and $2 billion respectively – while Goldman Sachs and Morgan Stanley have indicated that their losses will be minimal, despite both having dealings with Bill Hwang’s troubled hedge fund. However, on April 15, Morgan Stanley surprised their investors by reporting a total loss of $911 million because of the collapse of Archegos Capital Management. Goldman Sachs clarified that it was among the first to reduce its exposure to loans made to Archegos.

SPACs: Turning a Quick Profit

Leading banks all over the world have been cashing in on a recent trend hitting equities markets: SPACs. A SPAC – Special Purpose Acquisition Company – is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process.

As the pandemic created uncertainty in the IPO market and – as a result – private companies (or, more usually, private equity funds) began to eye viable exit opportunities, SPACs skyrocketed in 2020. While SPACs hit a record $13.6 billion in 2019—in itself more than 4X the $3.2 billion they raised in 2016 – this went up to $41.7 billion (or 44% of all public offerings) in the first nine months of 2020 alone. This was due to a synergy of opportunities on both sides of the deal: the target company is able to go public quickly while investors obtain high-reward investments with limited risk. Also, in the U.S., IPO fees are nearly twice of that compared to Europe.

The banks arranging this deal also benefit: a SPAC can be filed with very few details (unlike a traditional IPO), carries very little balance sheet risk and shifts responsibility for due diligence to the investors. In addition, disclosed fees for SPAC IPOs average at about 5.2% of gross proceeds and over the lifetime of the deal, can also net up to 50% more than IPOs in advisory deals.

Bloomberg data reveals that 4 out of the 5 banks we offer ETPs in have been particularly sizeable beneficiaries in the SPAC boom:

While the SEC’s decision to allow U.S.-listed companies to sell stock in direct listings – without requiring most of the investment banks’ suite of services – would likely help drive down SPAC costs further, it is widely considered unlikely that this trend will die away any time soon.

In Conclusion

Virtually every economist and analyst in the U.S. and Europe has been emphasizing a net recovery in the economy as lockdowns abate and normalcy returns. As vaccinations cover an increasing portion of the populace, this will likely hasten the return to what seems like a previous life.

It’s a generally tried-and-tested maxim that the banking sector does well when the economy does well and does much worse when the economy does badly. This can be seen in the U.S. banks over the past year relative to the country’s economic performance and true for European banks relative to the economic performance of European countries.

(Barclays remained an interesting outlier here on account of its strong synergy with and focus on its U.S. office.)

In fact, since the year began, virtually all of the banks have gone on to comprehensively outperform while roughly trending with the S&P Financial Select Sector Index (IXM) after discounting a dramatic swing both upwards and downwards in January, with Goldman Sachs and Barclays leading and HSBC on the path to drawing up par with the benchmark:

Thus, the lessons drawn are fairly simple: if seeking to invest in the banking sector, a play involving the best-performing banks in the world may add value to an investor’s portfolio.

References:

  1. Barclays Full Year 2020 Results, Barclays PLC
  2. JPMorgan beats profit estimates on better-than-expected credit, record trading revenue, CNBC
  3. Morgan Stanley reveals $911 million Archegos loss as profit jumps, Reuters
  4. Special Purpose Acquisition Company (SPAC), Investopedia

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

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