What are bank executives discussing on earnings calls?
Top themes from 4Q 2011
Our analysis of the leading issues emerging from the quarterly earnings calls of the largest global banks identifies what's top of mind for banking leaders. The top 10 themes from 4Q 2011 are listed below and compared to the themes from 3Q 2011.
Concerns related to the macro-environment, particularly those generated by the Eurozone crisis, again topped the themes for 4Q11 earnings calls season. In 4Q11, the European Central Bank and the European Banking Authority intervened to address the sovereign debt crisis, which has prompted European banks to further deleverage. Banks outside the Eurozone, which do not face the same urgency to recapitalize, view the deleveraging process as an opportunity to gain market share.
4Q 2011 earnings quarter top 10 themes
(listed from most common to least)
|4Q11 rank ||Change ||3Q11 rank |
|Concerns related to the macro-environment ||1.1 ||▬ ||1.1 |
|Capital issues ||1.2 ||▬ ||1.2 |
|Expense management ||1.3 ||▬ ||1.3 |
|Drivers of earnings performance ||1.4 ||▬ ||1.4 |
|Impact of regulatory reform ||5 ||▲ ||9 |
|Funding strategy and liquidity management ||6 ||▬ ||6 |
|Credit quality trends ||7 ||▼ ||5 |
|Globalization; presence outside home country ||8.1 ||▲ ||10 |
|Trends in lending ||8.2 ||▼ ||7.2 |
|Opportunities related to acquisitions, joint ventures and divestitures ||8.3 ||▼ ||7.1|
*Ties are noted by continuation of rank number (i.e., the first four themes noted as 1.1, 1.2, 1.3, 1.4) to next most discussed theme (i.e., #5).
Top themes from 4Q 2011 banking earning calls
- Significant macro challenges persist
- External headwinds, particularly those generated by the Eurozone crisis, had an impact on banks worldwide. The final quarter of 2011 was defined by the political and economic pressures that began to materialize early in 3Q11 and gained traction through the second half of the year.
- What started in July 2011 as concerns over sovereign debt exposure, the US debt ceiling debate and slowing global economic growth escalated and threatened to become a full-blown funding crisis in 4Q11.
- As pressures mounted, client activity levels fell, banks reduced risk and regulators intervened, resulting in what Credit Suisse CEO Brady Dougan called “a fundamental shift in the industry landscape.” By 4Q11, the main focus of concern had crystallized around the Eurozone crisis, which was hardest on European banks, but also had implications for banks worldwide.
- “While the broader marketplace first began to evaluate the economic challenges facing the Eurozone in 2010, the market's focus and concern accelerated meaningfully during 2011 and persists into 2012. The discussion evolved from largely a regional consideration into a significant global issue, as market participants became increasingly worried about the secondary implications of a potential sovereign default.”
- – David Viniar, Goldman Sachs CFO
- Capital deadlines vary around the world
- Banks worldwide are under pressure to meet higher capital requirements under a wide range of regimes. In the years following the 2008 financial crisis, banks' capital adequacy has been subject to heightened regulatory scrutiny.
- The Basel III capital framework was finalized in December 2010 with the intent of strengthening the global financial sector and establishing a level playing field. Since then, however, numerous other capital regimes have emerged, primarily affecting European banks.
- Most notably, the European Banking Authority (EBA) directed European banks to reach a 9% common equity tier 1 capital ratio by the end of June 2012. The recapitalization plan, announced on 26 October 2011, was described by the EBA as an effort to “restore confidence in the banking sector.”
- While all banks will eventually be subject to the same capital rules under Basel III, the diverging requirements have altered the pace of compliance and impacted competitiveness.
- “We're to the extent that there is not a level playing field around the world; it certainly does impact competitiveness and the franchise generally. We've been on Basel 2.5 since the beginning of last year, while many of our competitors are on Basel 2 or Basel 1, and that clearly creates an advantage if you're pricing and doing transactions on that basis.”
- – Brady Dougan, Credit Suisse CEO
- Expenses driven higher by investments and
- In 4Q11, expenses remained an area of intense focus, as banks sought to balance cost cutting with investments to support long-term growth. Bank of NY Mellon CFO Todd Gibbons stressed the importance of cost control, “In this environment, our success is really based on our ability to reduce the growth rate of operating expenses.”
- At the same time, management affirmed the necessity of investing to drive growth and respond to changes in the industry. Goldman Sachs CFO David Viniar said, “It is not possible to cut expenses as a means to prosperity.”
- “Our capacity to further cut costs in a tactical way is limited, so we must focus on strategic changes which go to the heart of our organizational design and structure. Consistently improving efficiency has to become part of our corporate DNA.”
- – Sergio Ermotti, UBS CEO
- Few positive earnings trends emerged in 4Q11
- In general, results at North American banks reflected growing momentum for retail banking operations and significant pressures on capital markets businesses. In Europe, revenues and profits were clearly impacted by the sovereign debt crisis and the regulatory response to it.
- Across all regions, the strength of banks' underlying performance was masked by a wide variety of extraordinary items. Citigroup CEO Vikram Pandit could have spoken for any bank operating a capital markets business when he said, “The fourth quarter was dominated by the macro-environment and our earnings clearly suffered as a result.”
Download our 4Q 2011 bank earnings calls report for details about these themes and to read about other top themes.