Deutsche Bank on Wednesday posted a pre-tax profit of €908 million for the first three months of 2020 – its best quarterly performance in seven years, and a notable increase on its profit of just €66 million for the same period in 2020.
Profits rose across all of the bank’s core divisions, though its investment banking arm performed most strongly with a 134% rise in pre-tax profits to €1.5 billion. Revenue across the bank grew 14% to €7.2 billion, its highest total since 2017.
CEO Christian Sewing attributed the strong results to effective risk management and tight control of costs. "Our first quarter is further evidence that Deutsche Bank is on the right path in all four core businesses, and is building sustainable profitability," he said. "In addition to substantial revenue growth over an already strong prior year quarter, we demonstrated cost and risk discipline."
Deutsche Bank’s strong quarterly performance is also significant in its avoidance of damage from the implosion of Archegos Capital Management. The family-run hedge fund collapsed in March and dragged down the profits of major banks tied to it. Credit Suisse made an immediate loss of $4.7 billion, while Morgan Stanley lost $1 billion and Nomura lost $1.43 billion.
However, Deutsche Bank made no mention of Archegos in its quarterly report despite being a client of the fund. The bank is understood to have conducted a relatively small amount of business with Archegos and exited positions quickly upon its collapse, minimising damages to its revenue.
Shares in Deutsche Bank rose as much as 6% in early trading on Wednesday upon the release of the quarterly earnings report.
Credit Suisse on Thursday reported a net loss of 252 million Swiss francs ($275 million) for the first quarter following the implosion of US-based hedge fund Archegos Capital.
The bank reported that the loss reflected a “significant charge with respect to the US-based hedge fund matter in 1Q21 (first quarter), offsetting positive performance across wealth management and investment banking.”
In response, the bank raised roughly $2 billion to bolster its capital position. To do this, it sold mandatory convertible notes to "a selected group of core shareholders, institutional investors and ultra-high-net-worth individuals."
In total, Credit Suisse has issued notes that will convert into 203 million shares in the bank. Half of these will convert in six months’ time at a 5% discount against the market rate.
Archegos Capital, a relatively unknown family office in New York, collapsed last month after making a series of highly leveraged bets on media and tech stocks. Credit Suisse, which dealt with the firm, was rocked by the collapse; the bank made an immediate loss of 4.4 billion Swiss francs ($4.7 billion) and dumped $2 billion worth of stock to end its connection with Archegos. The bank also overhauled its leadership, with Chief Risk Officer Lara Warner and investment banking head Brian Chin stepping down in the aftermath of the loss.
The $4.4 billion loss provision wiped out a 30% jump in Credit Suisse’s revenues for the first quarter, powered by an 80% revenue increase in its investment banking arm. The bank’s loss contrasts starkly with its 1.2 billion franc profit in the same quarter last year.
Credit Suisse is not the only major bank to have made significant losses on the collapse of Archegos. Last week, Morgan Stanley revealed a loss of almost $2 billion despite a 150% profit increase in the first quarter.
Morgan Stanley on Friday disclosed a loss of almost $1 billion from the collapse of private fund Archegos Capital Management, undercutting an otherwise upbeat 150% jump in first-quarter profit.
The Wall Street giant was one of six banks that had exposure to Archegos, a family office fund run by controversial former hedge fund manager Bill Hwang. Last month, Archegos defaulted on margin calls and triggered a stock fire sale.
In a call with analysts, Morgan Stanley CEO James Gorman said the bank initially lost $644 million on stocks it held related to Archegos’ positions, which it sold. It then decided to “derisk” its remaining positions, triggering the loss of a further $267 million.
"I regard that decision as necessary and money well spent," Gorman said.
Other firms hit by the collapse of Archegos include Credit Suisse, which estimated its losses from the event to reach $4.7 billion, and Nomura, which flagged a loss of $2 billion. The fund’s implosion is now being probed by a number of US watchdogs, as well as the Senate Banking Committee.
Shares in Morgan Stanley were down more than 1% in premarket trading after news of its losses broke. However, the bank’s overall results easily beat expectations, spurred on by a spike in trading volumes partly led by the Reddit-driven “meme stock” frenzy around companies such as GameStop and AMC Entertainment.
Morgan Stanley reported a net revenue jump of 61% to $15.72 billion. Net revenue applicable to shareholders rose to $3.98 billion, or $2.19 per share, as of 31 March.
US stock indexes were set to rise on Wednesday following positive earnings reports from investment banks.
JPMorgan Chase & Co and Goldman Sachs Group Inc both beat analysts’ expectations for first-quarter profit.
Goldman saw its overall investment banking revenue jump 73% to $3.77 billion, the highest amount seen since 2010. The bank managed to effectively capitalise on record global investment banking activity, which Refinitiv data showed as reaching an all-time high of $39.4 billion in the March quarter.
Meanwhile, JPMorgan, the US’s largest bank, reported earnings as having leapt almost 400% in the first quarter of the year. Like Goldman, it saw immense growth in its investment banking revenue, which jumped 57%.
JPMorgan reported that consumer spending in its businesses had reached pre-pandemic levels and risen 14% above Q1 2019.
Shares in Goldman rose 1.5% on Wednesday, while JPMorgan’s shares fell 0.6% despite its almost quadrupled revenue. The share slip came as the bank released over $5 billion it had set aside in reserves against COVID-19-prompted loan defaults.
Goldman easily held on to its first-place ranking for global M&A advisory, while JPMorgan overtook Morgan Stanley as the world’s second biggest advisor.
It was also revealed on Tuesday that Goldman Sachs plans to expand operations to Birmingham this year. The bank expects to recruit “several hundred” people across the divisions it builds, beginning with an engineering department that it will fill through a combination of new hires and employee transfers.
HSBC, the UK’s largest bank, posted a 34% drop in profit for 2020 and has signalled a “pivot to Asia” along with job cuts to compensate for the decline.
The bank reported a pre-tax profit of $8.8 billion from revenue of $50.4 billion in 2020, going slightly beyond analysts’ expectations of an $8.3 billion profit on income of $50 billion.
Part of HSBC’s losses, like those seen by Barclays, were caused by a sharp rise in credit loss provisions owing to the COVID-19 pandemic. HSBC set aside a further $1.2 billion in Q4 2020 to cover an expected rise in bad loans, bringing its total loss provisions for the year to $8.8 billion.
HSBC also reinstated a dividend of 15p, significantly above analyst forecasts of 10.1p, following the Bank of England’s lifting of its dividend ban in December.
Also on Tuesday, HSBC announced plans to accelerate its transformation plans. The bank is currently undergoing a major restructuring intended to reverse several years of underperformance, which will involve cutting 35,000 jobs and reducing costs by $4.5 billion by 2022. 11,000 jobs were shed during 2020.
The bank also signalled its intent to focus on opportunities for growth in Asian markets. Stephen Moss, its head of strategy, will take on the role of chief executive for the Middle East, North Africa and Turkey, and will relocate to Dubai from London. More executive roles are expected to relocate to Hong Kong, HSBC’s historic home base.
"I am proud of everything our people achieved and grateful for the loyalty of our customers during a very turbulent year," chief executive Noel Quinn said in a statement.
Barclays announced plans for a share buyback and a resumption of its dividend on Thursday as it revealed that its full-year numbers for 2020 came out at a £3.1 billion pre-tax profit.
Though the bank’s full-year profit was down 38% compared with 2019’s figures, Barclays still managed to defy analysts’ expectations of a pre-tax profit of £2.8 billion. This is partly owed to a slight increase in revenue, with its corporate and investment bank reporting a 35% jump in pre-tax profits for the whole of the year, the best on record for the division.
A large part of Barclays’ costs for 2020 stemmed from the bank’s decision to set aside £4.8 billion to cover loans that it considers unlikely to be paid back due to the economic impact of the COVID-19 pandemic. Its credit card and retail banking businesses were also struck by a downturn in demand, cutting pre-tax profits by 78%.
Barclays has been one of the largest providers of emergency loans during the COVID-19 pandemic, having issued around £27 billion to businesses and provided more than 680,000 payment holidays globally for customers with outstanding loans, mortgages and credit cards.
Despite its losses, the bank announced on Thursday that it would resume dividends, with payments of 1p per share issued to shareholders.
Barclays’ CEO, Jes Staley, expressed optimism on the back of the full-year earnings report. “Barclays remains well capitalised, well provisioned for impairments, highly liquid, with a strong balance sheet, and competitive market positions across the group,” he said.
“We expect that our resilient and diversified business model will deliver a meaningful improvement in returns in 2021.”
Separately from its results, Barclays also reported that its staff bonus pool for 2020 was 6% higher than the £1.5 billion pool it shared out in 2019.
Deutsche Bank AG closed 2020 with an annual profit for the first time in six years, owed in large part to a bond trading boom and having achieved cost-cutting targets.
For the full year, the bank made a profit of €624 million, up significantly from its net loss of €5.26 billion in 2019 as it underwent a major restructuring project. Analysts had expected to see a loss of €201 million, according to Refinitiv.
Profits were spurred on by Deutsche’s investment banking division, with net revenues rising 32% to €9.8 billion over the course of the year as trading in fixed income securities and currencies jumped 28%. The bank stated that this increase “more than offset a rise in provision for credit losses resulting from COVID-19.”
By contrast, Deutsche’s private banking and corporate banking divisions saw almost flat revenues in 2020, and asset management revenues fell 4%.
"In the most important year of our transformation, we were able to more than offset transformation-related effects and elevated credit provisions - despite the global pandemic,” Deutsche Bank CEO Christian Sewing said in the Q4 report.
"We are confident this overall positive trend will continue in 2021 despite these challenging times.”
Deutsche Bank’s years-long journey back to profitability has not been smooth, having faced allegations of money-laundering and received a $2.5 billion fine for the fixing of LIBOR. It has also recently been caught up in the Wirecard scandal.
The bank also announced 18,000 job cuts in 2019 as part of a plan to reduce the size of its investment bank, which is now the main driver of its profits.
Bank stocks plummeted internationally on Thursday, as the release of companies’ Q2 earnings have demonstrated the influence that the COVID-19 pandemic still holds over world economies.
Among those banks adversely affected in the second quarter were Lloyds Bank, which reported loss provisions at a rate higher than was forecasted, and BBVA and Standard Chartered, which both saw profits slide.
Combined with a historic contraction in the US economy, these bleak reports triggered a sell-off across the banking sector. The Euro Stoxx Bank index, which tracks the biggest banks in Europe, fell by more than 3%, and the MSCI European Banks index (which includes both British and European banks) fell by 2.6%.
Major stock markets were also dragged lower on Thursday; the FTSE 100 fell by 2% before noon, and the DAX and Spanish IBEX 35 fell by 3% and 2.7% respectively.
In all, the sell-off pointed to increasingly pessimistic investor attitudes in the wake of the COVID-19 pandemic. “We have seen the UK economy deteriorate since the first quarter,” remarked Lloyds CEO António Horta-Osório as the bank’s half-year profits were completely submerged by its setting aside of £2.4 billion as a loss buffer – £1 billion greater than analysts estimated. Shares in Lloyds subsequently fell by 9%, an 8-year low.
Barclays also fell below analysts’ expectations in its Q2 results, and Santander announced a quarterly loss of €11.1 billion, the largest such loss in its 163 years of operation.
HSBC announced today that it plans to cut 35,000 jobs over the next three years following an overall YoY 33% profit drop and subsequent restructuring plans. It also said the impact of coronavirus could affect performance in the year ahead, especially as the bulk of its yearly profits come from Asia.
Noel Quinn, HSBC’s current interim CEO has confirmed the job cuts as part of their upcoming overhaul and says the overall headcount of HSBC staff is likely to drop from “235,000 to closer to 200,000 over the next three years.”
Until recently, analysts had predicted a 10,000 staff slash ahead, but none imagined it would amount to a 15% cut of HSBC’s total global staff. Which regions the job cuts will affect the most is still unclear and unconfirmed.
Profits before tax dropped 33% in 2019 to $13.3 billion (£10.2 billion). The announced 35,000 job cuts should make way for a cost reduction of $4.5 billion by 2022, bringing profits before tax back to figures HSBC saw in 2018.
In regards to the coronavirus outbreak, Quinn has stressed that services and staff have been affected in mainland China and Hong Kong, and could continue over the next few months: “Depending on how the situation develops, there is the potential for any associated economic slowdown to impact our expected credit losses in Hong Kong and mainland China.”
“Longer term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains. We continue to monitor the situation closely.”
While HSBC's reported revenue rose 5% in the final quarter of 2019 the bank made a loss of $3.9 billion. The bank's share buyback scheme has been suspended but the dividend was maintained.
Finance Monthly heard from Ian Forrest, Investment Research Analyst at The Share Centre, who explains what this news means for investors:“Given all the bad news from HSBC today it was no surprise to see the shares going down 5.6% in early trading. While the bank is clearly taking action the changes will take time to feed through into the figures and the degree of uncertainty about current activity levels in a number of areas is likely to dampen sentiment towards the shares for some time.”
The guide, on How to Make Money from eSports, also labels the United States as the highest-earning country and Dota 2 the highest-paying game.
Aimed at both talented gamers and those who have an interest in eSports, content included uses historical data and cutting-edge insight to offer realistic guidance to those who dream of being the next MVP (Most Valuable Player).
Jesse “JerAx” Vainikka, from Finland made short of $2,500,00 last year, topping the five highest-earning players in 2018:
2019 is set to be particularly profitable, with the highest-earner predicted to pocket $3,292,966 in winnings.
Top tips to being the best include:
2018 proved to be a successful year for the top five highest-earning eSports players, who each took home an average of $2,270,509.
With prediction data, the average winnings of the top five players are set to rise by 39.6% from $2,270,509 in 2018 to $3,169,957 in 2019.
The highest-paying game in 2018 was Dota 2, which awarded a staggering $41,395,452 in prize winnings. Further success is apparent for Dota 2, which is forecasted as the highest-paying game for the next five years.
Forecasting your balance sheet can become a troublesome task accordingly, but here to help Finance Monthly readers is Ed Gromann, CPO at Centage Corporation, with some top tips.
Within all this uncertainty, businesses that want a steady path to growth are forced to ebb and flow with the changing nature of the world. This can feel like an insurmountable task, especially for a CFO that relies on consistency to meet the board’s expectations. As CFO, you can hardly throw up your hands and exclaim, “what is to be done?” All eyes are on you to even out the peaks and valleys as much as possible so that the organization may continue to operate without too much distress.
One way to detect the kid of crises that can upend the best-laid business plan is by forecasting the balance sheet on a regular basis. I realize that many CFOs don’t undertake this exercise because (let’s be honest) it’s not an easy task. This is a mistake. Forecasting the balance sheet can reveal critical details you’d easily miss in your P&L forecasts. Case in point: let’s say your VP of sales decides to offer a “buy now pay later” deal to stimulate sales -- a great way to build the sales pipeline. The company will certainly face all the upfront costs of registering and servicing new customers upfront, but without immediate revenue to defray those expenses. This sales tactic could lead to a cash flow issue later on in the quarter if not properly planned for.
As I mentioned, forecasting the balance sheet can be a bit of a bear, but these five tasks can make the task more approachable:
Look at your deferred revenue on a monthly basis to ensure it’s not getting too high, which can lead to cash flow issues later on. If you see that it’s getting high, take steps to correct it. For instance, you may need to restrict deferred payment terms offered by your sales team, or rollout a pre-paid product or service that will generate cash upfront. The sooner you spot a potential issue, the better you can plan for it.
Monitor your accounts receivable to assess whether or not you have some wiggle room. For example, you may incur some expenses in January that may not come due until later in the year. Monitoring them monthly will help you assess how much cash you actually have to get you through lean times. If you see an issue early enough, you may be able to renegotiate terms with vendors.
CEOs often ask, “what happens if?” and as CFO, you want to have answers. The best way to do that is to create multiple scenarios for your income statement forecast, specifically sales projections that meet, fail short of, or exceed the sales projections for 2019. Not only will this increase the accuracy of your balance sheet, but it will help the organization create and implement timely contingency plans.
Although I’m a firm believer in projecting what might occur, it’s important that you don’t forecast too far ahead. Although economic indicators are still strong, the stock market has dipped and we continue to live with the potential of trade wars, and so on. It’s wise to limit your balance sheet forecast for the next month or two ahead, as each new month will bring new changes that can affect the accuracy of your forecasts.
Sensitivity analysis is the quickest and easiest way to predict how change will affect your financial statements (I say quick and easy because it tests just one variable at a time, meaning you don’t need to change your underlying model). For instance, experiment with sales and expenses within your P&L to see how they flow through to the balance sheet. This exercise will help the management team make better and more accurate decisions.
No doubt as a CFO you’re pulled into many directions, and the last thing you want to take on is additional tasks. That said, forecasting your balance sheet is one of those tasks that will save you a lot trouble.
Your kids won’t stop talking about it, your friend hasn’t come out of his house all week because he’s addicted to it, some of the world’s biggest sports stars and youtubers are doing it. It’s not a drug, it’s a game; Fortnite, and with so many playing the game month to month, the creators are making quite a killing. Below Ken Wisnefski, CEO of digital marketing firm WebiMax, discusses the microtransaction element behind Fortnite’s big profits and the future of this clever new way of selling.
Like so many quarters fed into an arcade machine, an around-the-clock influx of outside cash has turned the video game industry into a revenue resource like no other. Whereas video games were once a one-time purchase rarely exceeding $50, we now have free-to-play offerings like “Fortnite” that can rake in millions. How is that possible? “Microtransactions” and “platform-based business models” allow gamers to customize their experience by spending real-world cash in exchange for in-game goodies. The fact that Fortnite developer Epic Games earned just shy of $300 million in April 2018 alone tells me a few things as a digital marketing expert, but chief among them is this: We’re not in Super Mario World anymore.
For the unacquainted, Fortnite is a co-op survival game that takes place in a “sandbox” universe and drew a record 3.4 million concurrent users in February 2018. On the revenue side of things, there are aspects of Fortnite that are free to download. There’s also a roughly $10 seasonal “Battle Pass” that’s optional, last for a few months and provides additional immersion. The microtransactions that I mentioned earlier – and the platform that makes this exchange possible – is a hotly-debated concept among gamers. In the case of Fortnite, many say Epic Games got it right and I agree.
“Rank your Battle Pass up before it expires, and you'll earn more than enough in-game cash to unlock the next Battle Pass,” a March 2018 GamesRadar.com article says. “That eliminates the dread of having to pay more and more cash to stay up-to-date in a living game, and it encourages you to keep playing for the whole season and into the next. So smart!”
The Emperor’s New Clothes
Microtransactions are, as the name suggests, a way for users to pay a nominal amount of real-world cash or in-game currency and receive small game-enhancing perks as a result. There are right and wrong ways to implement microtransactions into a game. The wrong way, as Electronic Arts (EA) learned in 2017, is to sell “loot boxes” to users that create an unfair playing field. This crisis came to a head upon the release of “Star Wars Battlefront II.”
“We’ve heard the concerns about potentially giving players unfair advantages. And we’ve heard that this is overshadowing an otherwise great game. This was never our intention. Sorry we didn’t get this right,” a statement from EA read following player backlash.
Only months later, “cosmetic-only” microtransactions were up and running again inside that galaxy far, far away. Back here on Earth, I think the majority of us can see the parallels between EA now selling “loot boxes” that don’t affect gameplay and what Fortnite has been doing since launch. In my experience in digital marketing, someone who wants to spend their own money on attainable goals should be able to do so. When you start toying with the framework, such as paid-for results at the top of a Google search page, then we need to throw in some disclaimers or other ways to give everyone equal footing.
Try and find Apple’s brick-and-mortar “App Store” in your neighborhood. We won’t wait around, because we all know it isn’t there. Slate reported in early 2018 that this non-physical outlet for iPhone programs earned $38.5 billion in 2017 and “is poised to double its 2015 revenues by some time in 2018.” What readers should understand is that there’s no longer a need to offer physical goods as the only way of making money. Today, we have people streaming their live feeds of Fortnite gameplay on the Twitch website and reportedly making $500,000 per month doing so. Amazon may be building local warehouses to help expedite shipping, but it started as an online-only book-ordering company and its CEO is now the richest man on Earth.
I find it helpful to think of ride-sharing services as a more tangible example of what digital platforms can offer: An actual good or service that’s obtained for a payment on a middle ground – or “platform,” if you will. I only have to look under my own roof, where kids are playing Fortnite, to see what microtransactions have evolved into and how in-game “V Bucks” can be spent on spiffy new avatar outfits.