| Volatility in global markets has been at high or extremely high levels during the first six months of 2022. Source: Michael M. Santiago/Getty Images News via Getty Images |
The investment bank units of BNP Paribas SA, Crédit Agricole SA and Société Générale SA are set to benefit from the volatility that has gripped global markets since the beginning of the year.
Escalating uncertainty about the global economic outlook caused wild swings in markets throughout the first half of 2022, with the fluctuations in equity, bond, currency and commodity markets expected to boost trading income at France's largest listed banks in the second quarter, just as it did in the first. The strong trading performance in the first three months of 2022 helped BNPP and SocGen to their best ever start to a year in terms of total operating income, while CASA had its second-best first quarter ever, S&P Global Market Intelligence data shows.
Strong second-quarter earnings from the French banks' corporate and investment/institutional banks, or CIBs, would echo those reported recently by the major U.S. investment banks, which have similarly large trading businesses. JPMorgan Chase & Co., Morgan Stanley and The Goldman Sachs Group Inc. all cited increased market volatility as a driver of their growth.
BNPP kicks off the second quarter earnings season for French banks on July 29.
"Volatility in Q2 has definitely been the word from all the investment banks," said Jon Peace, head of European banks research at Credit Suisse.
Fees from trading in equities, fixed income, currencies and commodities across global markets have a strong correlation with market volatility, Peace said. This is particularly the case with equity derivatives like options and swaps, in which the three French banks specialize, as well as interest rate and foreign exchange products, said Peace.
High volatility
Volatility across markets has surged in recent months as investors grapple with the impact of surging inflation, rising interest rates and the impact of the war in Ukraine. Realized volatility across a range of global stock indexes is at high or extremely high levels historically, according to S&P Dow Jones Indices data.
The French lenders' CIBs, which house their trading businesses, are expected to have been a strong driver of total revenue growth in the second quarter, according to a July 25 note from Flora Bocahut, European bank equity analyst at Jefferies.
"We are constructive on Q2 results at French banks," Bocahut said. "We expect continued good revenue momentum in CIB, especially [in the banks' trading businesses], fleet management, and Central and Eastern European retail."
The boost to revenues from the banks' second-quarter CIB performance will benefit BNP and SocGen more than CASA, which usually derives a smaller portion of its total income from its CIB, Bocahut said.
BNP generated almost 31% of its operating income from its CIB in 2021, while SocGen produced more than 34% from its corresponding division, Global Banking and Investor Solutions, S&P Global Market Intelligence data shows. CASA gained less than 28% of its operating income from its CIB during the same period.
On track
BNP and SocGen were already on track to beat last year's second-quarter revenue performance by 4.8% and 3.3%, respectively, according to the median of analyst estimates compiled by Market Intelligence. Analysts expect CASA's second-quarter revenue to fall year over year by 1.2%, according to Market Intelligence data.
The likely strong second-quarter performance from the French banks' CIBs would follow a similarly positive first quarter, when the ongoing volatility in markets first began to surface. The prospect of rising interest rates and Russia's invasion of Ukraine shook markets in the first three months of the year, boosting activity for traders at the three French lenders.
"We saw good performances in Q1 across everything in global markets: fixed income, equities, really all areas experienced strong growth," said Arnaud Journois, vice president, global financial institutions at credit rating agency DBRS Morningstar. "It was even stronger than what we experienced in Q1 2021, which was already a high base, and it really drove the revenue increase for all banks in the first quarter."
All three French banks saw revenue growth at their CIBs in the first quarter.
BNP enjoyed the strongest boost to income with a more than 28% increase in CIB revenue to €4.7 billion, including an almost 53% surge in income from its global markets business. Fixed income, currencies and commodities had "very strong client demand" for reallocation and hedging across the products as markets swung, BNP said.
The volatility gripping markets since the first quarter made forecasting the performance of the banks' CIBs tricky, said Nicolas Hardy, deputy head of financial institutions at Scope Ratings. "The very strong increase in CIB revenues at BNP in Q1 was striking," Hardy said. "It's very difficult to compare apples with apples across banks because this is a very competitive segment and public communication on the underlying drivers of CIB revenues is not detailed."
The unpredictability of CIB revenues was evident in Danish lender Danske Bank A/S' second-quarter results, reported July 22. Denmark's largest bank saw net profits slump by more than a third year over year driven by a 390 million kroner net trading loss, which it attributed to "extraordinarily high volatility and lower liquidity in the Nordic fixed income markets."
Here to stay
Turbulence is set to persist across global markets in the third quarter, said Sam Theodore, senior consultant at Scope Insights.
BNP declined to comment. CASA declined to comment due to the imminent publication of second-quarter results. SocGen had not responded to a request for comment by the time of publication.
As of July 27, US$1 was equivalent to 7.35 Danish kroner.