“Turning points in human consciousness occur when new energy regimes converge with new communications revolutions, creating new economic eras.” – Jeremy Rifkin
Like watching a movie in slow motion, this week Alphacution adds some incremental modeling on UBS and Credit Suisse to its recent analysis on bank-owned broker-dealers. We start with this metaphor to emphasize the caveat that anything observed in slow motion may be prone to some illusion. So, this opening is simply fair warning – and a grain of salt.
Also, for those of you who are new to the thread and want to catch up, we started with “Remembering Deutsche Bank: A Market Macro-Structure Canary?” and then followed with “Goldman, Morgan and Deutsche: Comparing Bank-Owned Broker-Dealers in Equities.” Both are worth a read… (The rest of us will wait here while you do so.)
Anyway, if we were to take Deutsche Bank Securities, Inc. (DBSI) as a guide, wherein 18-year lows of measures like gross cash equities – which is the sum of equities owned and equities “sold but not yet purchased” – were used to represent relative strength or weakness of the underlying business, we would then need to put our friends at UBS and Credit Suisse in the same category. For each of DBSI, Credit Suisse Securities (USA), LLC (CSS) and UBS Securities, LLC (UBSS) – all three the US broker-dealer arm of a foreign bulge bracket bank – gross cash equities levels sit at 18-year lows as of December 31, 2018 (see below).
Though we will need to dig deeper to understand and then explain wtf is going on with CSS between about 2005 and 2013 (and therefore we will ignore it for now), a measure of net cash equities – which is the difference between equities owned and equities sold but not yet purchased – displays a similar trend: All three display among the tightest dollar-neutralities in equities for 2018 relative to the full 18-year period (see below).
However, it is based on the next measure – total broker-dealer assets over the 18-year period beginning 2001 and ending 2018 – that we may discover the greatest cause for concern here. If the longevity of Deutsche Banks equities business is now in existential jeopardy – particularly in contrast with their relatively strong FICC (fixed income, currency and commodity) business – then Credit Suisse and especially UBS (with roughly half the assets of DBSI and CSS and a weaker FICC business) may find themselves in a similar predicament (see below).
Now, in respect of the possible illusions of incrementalism, it’s premature to run this warning all the way up the tallest flagpole without performing similar modeling and analysis on the other bulge players, like Citigroup, Bank of America, JPMorgan, HSBC, Barclays, and SocGen (see quarterly market share chart below), as well as some 13F analysis to assess possible shifts in holdings and positioning. We will likely not be back on this topic until we can be a bit more comprehensive…
However, if these measures continue to deteriorate, expect the probability of retrenchment scenarios – like those of DB’s recent announcements – to increase. Periodic headlines illuminating layoffs, departures (including team liftouts) and/or restructurings should support persistence of this trend. Furthermore, we don’t see anything on the horizon to turn the macro-driver of disintermediation around – so, some of this is merely a matter of time.
Apologies for the partial buzzkill. It’s awfully tough to throw a towel being impersonated by a wet blanket…
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