European Wholesale Banks
SECTOR REVIEW
Even more about trading
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As Q2 comes to an end, and the coming results season looks likely to
be driven by trading profits, we look at some of the more fundamental
drivers. On the key issue with respect to the Q2 earnings, we have little to
add to our analysis from last month (Stronger for longer, 14 May) and similar
research reports published earlier this year. A combination of strong
inventory gains, reversal of last year’s losses, healthy client volumes and
wide bid/ask spreads have ensured that H1 09 has seen conditions in FICC
trading businesses that are as close to perfect as could reasonably be
expected. We believe our Q2 forecasts will reflect these market conditions,
but we believe that it is more important to look at the fundamental drivers of
profitability; we reproduce analysis from our recent report Buy the Boerse,
Sell the Bank (21 May) on long-term threats to pricing in the OTC fixed
income trading market in this report.
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There has been a big move in the net financing of primary dealers.
Because detailed aggregate data on proprietary trading, particularly in fixed
income, is almost impossible to find on a timely basis, we have been using
the FRBNY’s series on “net financing of primary dealers” as a proxy. This
net financing series has been falling steadily since the beginning of the crisis,
but has risen by over US$150bn since the start of April. In this month’s
report, we look at the underlying components of net financing and at the
corresponding “positions of primary dealers” dataset to try to understand the
move. We conclude that the majority of the movement reflects the ongoing
normalisation of the money market, resulting in a drop in net lending by the
primary dealers to second-tier banks through the government bond repo
market; as a result, the true movement is much smaller and is largely
attributable to an increase in corporate bond holdings.
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The global fee pool was stronger in May due to a return of equity
capital markets revenue. High-grade debt issuance slowed slightly, while
high-yield recovered somewhat; only M&A continued to be weak. The overall
fee pool is down on Q2 08, but tracking 29% higher than Q1 09. We remain
sceptical about the sustainability of these revenues, given the dominance of
a few large deals in the aggregate numbers, but with little qoq change in
market shares, they point to a strong Q2 earnings season.

Table of contents
Primary dealings 3
Behind the data 3
Conclusions and caveats 7
OTC spreads: Long-term issues 9
Sizing the OTC market. 9
Pricing power weaker than it looks 10
Structural reasons why pricing power will weaken 10
Regulatory moves could exacerbate this trend 11
Deutsche Bank is the most exposed 12
1. Summary of quarterly activity 13
2. Global fee pool 14
3. Performance 15
4. Valuation 17
5. Equities 19
5.1 Equity market volatility 19
5.2 Equity market and derivative volumes 20
5.3 Equity trading market shares 23
6. Fixed income 24
6.1 Bond market volatility 24
6.2 Bond market volumes 26
6.3 Bond spreads 28
7. Proprietary trading 29
8. Hedge funds 32
9. Mutual funds 34
10. Underwriting 36
10.1 Equity underwriting activity 36
10.1.1 Equity underwriting historical snapshot 38
10.1.2 Equity underwriting margins 39
10.2 Debt underwriting activity 40
10.2.1 Debt underwriting: Historical snapshot 41
10.2.2 Debt underwriting: Margins 41
11. M&A advisory 42
11.1 M&A: Historical snapshot 45
11.2 M&A: Margins 46
12. Corporate banking 47
12.1 Credit default swap spreads 49
12.2 Corporate defaults 51
12.3 Syndicated loan margins 52
13. Recent Credit Suisse wholesale banks research 53
14. European banks’ credit ratings 54
Team List 55