Banking on Markets

- Challenging Macro Backdrop: "The combination of heightened European sovereign risk fears, the US 'flash crash', increased regulatory uncertainty and renewed deflationary concerns made for a tough backdrop for the capital markets business. While April was generally consistent with the 1Q10 strength, May presented challenging trading conditions, while client activity was subdued in June. This was highlighted in Barclays’ recent trading statement."
- FICC Trading Hit By Credit: "1Q10 was characterized by across-the-board strength, notably in credit trading and mortgages. However, a sharp widening in credit spreads from May is likely to have caught some players off-guard in credit trading. We believe that the global macro businesses - Rates & notably FX - are likely to have fared better, together with mortgages."
- Equities Impacted By Derivatives: "The combination of a spike in correlation and volatility together with a significant drop in dividend expectations is likely to have made for challenging conditions for the equity derivatives business. The cash equities and prime brokerage operations continue to be relatively lacklustre."
- WM operating leverage delayed: "Weak investor confidence and the low interest rate environment continue to pressure wealth management margins. Together with negative market performance in 2Q10, the positive operating leverage story for the wealth management business is likely to be delayed to 2011. Nonetheless, the business model continues to offer significant leverage to an upward shift in the yield curve, as highlighted in our recent report Swiss Banks – Feedback from Zurich Meetings (30 June 2010)."
- Estimate Changes: "To reflect the tougher operating environment for both investment banking (weaker capital markets) and wealth management (margin pressure and lower managed assets), we downgrade our 2011E EPS for Credit Suisse (-10%) and UBS (-10%). Following our more recent update (German Banking M&A, 6 May 2010), we have further trimmed our Deutsche Bank estimates (-5%). Our new target prices for CS (SFr55), Deutsche Bank (€53) and UBS (SFr19) reflect these lower earnings and a higher cost of equity."
- Preference for UBS and SocGen: "In our previous Banking on Markets: Upping the Regulatory Ante (20 April 2010), we downgraded our view on capital markets on the basis that 1Q10 FICC strength had largely been priced-in while regulatory concerns were likely to remain heightened through the US Senate debate. Although there is greater clarity on the regulatory front, we do not see any nearterm catalysts on the earnings front. Our preference remains for UBS driven by the ‘self-help’ story, as well as SocGen which should benefit from the turn in the corporate and international credit cycle."
Citigroup Banking on Markets 20100701