Global investment banks experienced a torrid first half of the year as falling trading income affected the bottom line.
The trading income of behemoth Morgan Stanley dropped by 70% in the second quarter as slower Chinese economic growth, ongoing eurozone troubles and fears of lower growth in the US spooked markets. The negative sentiment also spilled over to European banks, with net profits at UBS and Deutsche Bank dropping 58% and 46% respectively in the second quarter.
SA investment banks again performed creditably under the circumstances, but Standard Bank's corporate and investment banking division did report 7% lower earnings. Like global investment banks, it was hit hard by negative trading conditions in the second quarter, though it increased income from transactional products and services by 21%.
The corporate and investment banking division is driving Standard Bank's expansion into other African countries, with Angola and Nigeria the focus. The return on equity from these operations is still low as millions are spent on retail branches in Angola and the development of the corporate lending market in Nigeria.
Kagiso Asset Management equity analyst Jihad Jhaveri says this is a normal development. Standard Bank is way ahead of other local banks with its Africa strategy. "Standard's exceptionally strong SA corporate and investment banking capabilities have resulted in the group making faster progress in this area in Africa."
Income for the division is expected to increase over the longer term as investments pay off. But it is clear the unit suffered setbacks in the first half of the year. Credit impairments shot up to R861m from R120m at the end of June 2011, with only R500m expected, while operating expenses grew 20%. Impairments were especially pronounced at the investment banking operations, where income grew 19%, but earnings dropped 18%.
Though not as bad as at many other global operations, African businesses at Standard Bank are set to come under more pressure for the rest of the year.
Absa Capital, now grouped together with the commercial and wealth division to form the capital, investment banking and wealth division, grew revenue 10% to R4,2bn and headline earnings were 14% up at R1,352bn at end-June. Investment banking revenue increased 7% but income from fees declined by 21%.
Financial director Dave Hodnett says there is momentum in the business and the African expansion strategy is progressing well under the Barclays banner. "We are following a very customer-centric policy, though our fee business at investment has been under pressure."
But overall trading income at Absa has not been hit as hard as at some global banks. Though much smaller in scale, the fixed income and credit division, known as fixed income, currency and commodities, experienced a moderate fall in revenue of 4% to R815m. The ancillary foreign exchange and commodities division, however, increased revenue 15% to R560m, and Africa performed well with an income boost of 38% to R165m.
Hodnett says the rest of Africa will remain an important focus area for Absa as its "one bank in Africa" strategy unfolds. "We are receiving support from Barclays in London and do not expect that to change."
With high economic growth recorded in many African countries, costs in general remain the main stumbling block. But the overall cost ratio at the capital, investment banking and wealth division at Absa decreased to 54,7% in June from 58,8% in 2011.
Nedbank Capital lifted its headline earnings 25% to R683m, but revenue from market trading was under pressure. Bad debt losses spiked to 1,41% from 0,86% but costs are clearly under control - the cost ratio fell from 49,4% to 43,3%.
Traditionally the smaller player in the investment banking setup, Nedbank Capital has to be circumspect with its African strategy. It has up to now focused on seeking specific opportunities, with much hinging on its plan to eventually convert its US$285m loan to West African banking group Ecobank to equity.
Nedbank CEO Mike Brown has indicated that Ecobank is set to become a full-blown equity investor. This will give Nedbank a strong presence in the Nigerian market, where Ecobank has taken over Oceanic Bank.
But the global investment banking headwinds could still affect the SA investment banking scene. The main problem for local players has been a sharp decline in fee income due to limited deal activity. Investment banks in sub-Saharan Africa, where many local banks face fierce competition from global banks, have been hit particularly hard by this.
According to research done by Thomson Reuters, investment banking fees across all products dropped 64% to $114,1m during the first half of 2012 compared with the same period in 2011. The second quarter marked the slowest quarter for fees in the region since 2005.
The strong competition SA banks are experiencing from global banks is clearly illustrated by overall fee income. RMB Holdings and Investec were among the top three performers in the first half of 2011. But in the first half of 2012 Investec fell out of the top 10 and RMB Holdings fell to the seventh position. Standard Bank was not in the top 10 table in 2011, but is now fourth, after concluding strong deals in several other African countries.
JPMorgan's sub-Saharan African activities are progressing well - the global player earned the top market share of 14% in the fee league for the region, up from 7% in 2011.
Local JPMorgan CEO John Coulter says a few large deals can make a big difference in any year.
He admits that the volume of business is slowing. "I predict that basic banking services will drive African growth in the foreseeable future. That is where the greatest opportunities are; there are fewer in investment banking."
The sub-Saharan African market has shrunk. In 2007, 36 banks were involved with specific syndicated loans. This has fallen to only eight banks being active in loans this year. France's Crédit Agricole is the latest investment bank to close its doors in SA. "Funding is much harder to get," Coulter says.
Merger and acquisition activities remain the main focus, accounting for 43% of all investment banking fees, but these activities declined 36% in the first half of 2012. Deutsche Bank, Standard Chartered and Bank of America/Merrill Lynch remain strong African players in this market.
Globally the trend has been to combine investment and corporate banking activities, and JPMorgan has taken the lead in this. Other global banks are set to follow, with the selling of noncore assets remaining an ancillary target.
Due to the smaller scale of investment banking activities at SA banks, these are set to remain within overall group activities.
But the going will be tough. Ernst & Young's banking index report for the second quarter has already indicated a drop in the confidence level at investment banking divisions. A considerable lowering of investment income is predicted.