Pity the poor investor trying to stack up one set of investment bank results against another.
The big European banks begin reporting first quarter earnings this week. Trading will be weak. Transaction volumes are down. It ain't going to be pretty. But trying to discern whose investment banking business is best -- or worst -- is an ugly task.
First, whereas investment banks once all aimed to be all things to all people (more or less), that's no longer the case. All the big banks are getting out of geographies or business lines in which they don't make a decent return or where they're exposed to too much risk. As they scale back, each of them can be disproportionately hurt in a specific quarter by a slowdown in China or volatile markets. Results can be juiced by a few good months in an area of strength.
Uneven disclosure is an even bigger challenge. Comparing reported returns across the big firms' investment banks will give you a clear picture of who is getting it right, right? Maybe not.
Taking a look at results for 2015, UBS's investment bank comes out well on top of its peer group, reporting a return on equity for the unit of 25.9 percent. That's about double what many rivals reported.
But there are large variances in how each bank calculates this number. In particular, accounting rules provide plenty of leeway on how items such as goodwill or the costs of non-core businesses or surplus capital are attributed to specific business lines -- or whether they’re absorbed instead by the corporate center (something that's much bigger at UBS than at its peers). That can have a significant impact on the returns reported by different business segments at different banks.
Barclays analyst Jeremy Sigee noted recently that if group equity is fully allocated out, "rather than leaving large chunks parked conveniently in the corporate center," then the investment banking units of most big banks deliver "surprisingly consistent" returns of between 7 and 10 percent.
But one challenge to this approach is whether it's helpful to burden the business units with everything sitting in the corporate center, including legacy items that don't give you any indication about how the investment bank is performing now and how it's likely to perform in the future. The problem for shareholders is that it's tough to get a fair comparison between investment banks because of the patchy levels of disclosure about just these sort of figures at different lenders.
There's also a crucial backdrop to this debate, in that it comes as investment banking bosses are locked in a fierce battle for capital within their organizations. It's tough for bank CEOs to justify investing in business units that appear to perform worse than stronger peers. Barclays boss Jes Staley, for example, is trying to convince shareholders that investment banking still has a place at his company, a campaign not helped by the relative vigor of UBS.
So while investors would certainly welcome the chance to compare apples with apples this earnings season, this argument resonates all the way to the boardroom. Those determining the future shape of Europe's biggest banks could use more clarity.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Duncan Mavin in London at firstname.lastname@example.org
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