Outlook for Global Wholesale and Investment Banking - BlackRock ...

March 16, 2010BanksPart 2 – Investment Thesis and Top PicksThis valuation section solely reflects the views of MorganStanley Research, not Oliver Wyman.Key stock ideas – EuropeTop picksLeast preferredBarclays (1.0x TNAV) BME (10.5x 10e)CSG (8x 10e)CBK (1.1x TNAV)Soc Gen (1.2x TNAV) DX (1.0x TNAV)BNP (1.4x TNAV)Schroders (13x 10e ex-cash)Key stock ideas – North AmericaTop picksBAC (1.5x TNAV)JPM (1.6x TAV)TD (11.6x 10e)BX (15.3x 10e)AMTD (16.7x 10e),Key stock ideas – Japan, EMEATop picksNomura (1.0x TNAV)Standard Bank (1.6x TNAV)We have revised estimates for a number of the large capwholesale banks we cover: DBK, BNP, Soc Gen, BARC,UBS, CSG, BAC, JPM and C. See Exhibits 40-41 below.Key Themes~15% lower underlying revenues will make market shareeven more critical for successRefreshed by our project with Oliver Wyman, we expectunderlying revenues to be down in 2010. With this note, wetrim our outlook for equity trading and IBD. Equity issuance inQ1 is down 51% on the 2009 average, although DCM is up10% and M&A down 13%. We tweak our FICC forecastsbased on slightly stronger rates/FX from volatility in Q1.Across our European universe, we model equity tradingrevenues to be up ~9% in 2010/2009, FICC (ex marks/DVA)to be down ~26%, IBD up ~8% and total revenues down 15%(pre-marks/DVA). This equates to revenues +16% on areported basis. (See Exhibits 40 and 41 for estimate changesfor all our global coverage, which have similar drivers.) Thisputs pressure on those players pursuing re-invest for growthstrategies, and may lead to stronger refocusing as the yeargoes on if early wins are seen in H1.The spread of returns, although narrowing, will probablyremain – and put more pressure on those reinvestingIn 2009, our coverage universe made ~20% pretax returns (exDVA) with a median of ~27%, on our estimates, implying~14% post-tax returns on equity. But the range was very wide:from -27% pretax ROE at Soc Gen and -17% at UBS, to+47% at BNP and +35% at CSG. We model ~24% averagepre-tax ROE in 2011 in our base case, and think it likely thatsome divergence between players will persist. For instance,so far this year, JPMorgan is #1 in both ECM and DCM andsaid at its recent investor day that it aims to grow share inboth issuance and trading. Perhaps more notable, CSG is #5in ECM and #3 in DCM and #4 putting both together year todate – the highest position for CSG we have ever seen.Without wanting to overstate a 10-week run, we think thisdoes underscore the benefits of momentum that we havebeen highlighting in our research. Although we expect upsideExhibit 352009 investment banking pretax ROEs showed widedispersal …-30% -20% -10% 0% 10% 20% 30% 40% 50%BNPPTD47%43%RYJPMCSG39%36%35%GSBARCHSBCBNSGroup MedianBMO31%30%29%29%27%25%DBKGroup AverageBAC21%20%20%RBS5%Nomura-5%CM-9%UBS-17%Soc Gen-27%Exhibit 36Our expectations for pre-tax ROEs in 2011 showgreater normalization by 2011e, but still a spread0% 5% 10% 15% 20% 25% 30% 35% 40%BARCTD36%35%RYBNPP33%33%CMBNSRBSBMOJPMGroup MedianDBKCSGGroup AverageHSBC30%29%28%26%26%25%25%25%24%23%Soc Gen19%UBSNomura12%10%JPM pre-tax ROE on going forward capital of $40 bill, reported pre-tax ROE was 36%.Source: Company data, Morgan Stanley Research (2012)33