SocGen-BNPP: Investment bankers withstanding jeers outside their windows should at least be hearing cheers from down the hall. They have shouldered the burden of rising provisions served up by their commercial banking brethren during the second quarter. It is a stunning reversal from last year, with results from BNP Paribas, Société Générale and Unicredit providing fresh evidence for the turn.
The French and Italian universal banks have followed a similar storyline as their US and UK counterparts. Unicredit’s net profit fell 74 per cent in the second quarter as provisions quadrupled from a year ago. Cost-cutting helped nudge the bottom line ahead of what analysts had been expecting. But bigger support came from investment banking, which swung from a loss to an operating profit of 1.2 billion euros on the back of strong trading revenue.
It was a similar story at BNPP and SocGen. While BNPP’s revenues from debt and commodities fell 33 per cent from the previous quarter, the exceptional Q1 had beaten full-year performance from 2007, and they still managed to offset rising provisions across the group. Meanwhile, the rate of loans in or near default continued its steady climb at SocGen, reaching 4.2 per cent in the period. But again, trading revenue more than kept pace.
The combination of investment and commercial banking was always pitched as a way to optimise cross-selling and harness the full benefits of the “originate-and-distribute” banking model. Lenders can now also point to diversification as another reason to reject any return to the banking segregation of Glass-Steagall.
These banks should enjoy the benefit while it lasts. Central bankers aren’t expected to turn off the money spigots any time soon but that doesn’t mean the trading bonanza is sustainable. Competition ought to beat profits down as old investment banking rivals rebound and new ones rush in. The supply of better-quality corporate bonds is easing, as is the yield gap on US Treasuries. Equity market momentum is slowing.
The forces behind loan losses look more durable. Unemployment and small-business failures continue to rise in western Europe. Eastern Europe still faces harsher decline, and currency devaluations there could be felt further west.
The trading post banks are leaning on may not be there to hold them up much longer.
