Bank of America and Citigroup were among the first. Last year, the two U.S. banks began crowing about the virtues of their corporate client base in fixed income sales and trading. Corporate clients provided "scale and stability," said Citi CFO John Gerspach. Corporate clients provided solid traded revenues, echoed Brian Moynihan at Bank of America. As of this year, other banks appear to be reaching the same conclusion. And it's a conclusion that's upsetting the established hierarchy in their sales and trading businesses.
Deutsche Bank offers the clearest example of the new world order. The German bank's new-new strategy, announced earlier this month, involves the reorientation of its global markets business as a "corporate led business." Barclays appears to be pursuing a similar strategy. During the most recent investor call, CEO Jes Staley said that Tim Throsby's mission as CEO of the investment bank is to 'sweat the balance sheet' and make the most of corporate clients in the style of J.P. Morgan.
Corporate clients' advantages are evident in the top line. Last summer, J.P. Morgan's banking analysts noted that the banks which focused on corporate clients were achieving better revenue growth in fixed income currencies and commodities (FICC) sales and trading than the banks which focused on institutional clients. The former include the likes of HSBC and J.P. Morgan. The latter include the likes of Deutsche Bank and Goldman Sachs.
As the chart below shows, J.P. Morgan's analysts were onto something. Corporate-focused FICC businesses trounced their institutionally-focused rivals for in terms of revenue growth last year. Unlike institutions, corporates have to make transactions for hedging purposes, irrespective of market volatility. As Oliver Wyman and Morgan Stanley pointed out in their report this month, corporate-focused trading businesses also tend to be less capital intensive than institutionally focused ones. Corporate transactions are simpler and don't require banks to risk their own balance sheets. Corporate clients therefore offer faster growth and higher returns.
Deutsche's new strategy looks like a no-brainer.
What is a "corporate client"? Deutsche defines them as, "corporations, infrastructure firms, private equity partnerships, governments, insurance companies, banks and other non-bank financial institutions." By comparison, Deutsche defines institutional clients as, "institutional investors, banks, clearing houses and pension funds." This is a broader definition of corporate clients than usual, but it still marks a departure from the norm. It reflects that the historically "sexy" salespeople and traders who work with institutional investors and (we assume) hedge funds, are out of favour. The blander markets professionals who work with the Unilevers and the insurers and the treasury departments are in.
This is a shock to the banking system. All the more so because corporate sales teams are tiny and institutional sales teams are huge. "Corporate teams are at the less sexy end of the spectrum," says one fixed income headhunter. "These are the guys who help manufacturers in Manchester hedge against their sterling exposure. It's just not as sophisticated or interesting as, say, working with a billion dollar hedge fund that wants to inflation-proof its portfolio."
This isn't to say that Deutsche is ditching its institutional focus. The German bank will still have institutional clients in future, it's just that they'll be less important to its overall strategy. In rates, for example, growth won't come from the bank's hedge fund clients (who, in any case, proved unreliable during its hour of need last September) but from "strategic partnerships" with the pensions and insurance industry. In the circumstances it's no coincidence that Dixit Joshi, former head of the Institutional Clients Group (ICG) at Deutsche has become the bank's treasurer or that senior institutional salespeople are leaving.
Not all banks are using 2017 to reorient towards corporates. Goldman Sachs, for example, remains institutionally focused, with a consumer lending business on the side. Credit Suisse is pursuing its strategy of, "serving ultra-high-net-worth individual and entrepreneur clients" and cross-selling across its private and investment bank. Overall, however, Oliver Wyman expects that the shift towards corporate clients could diminish banks' institutional revenues by $2bn to $4bn in the next few years. Suddenly, those sexy hedge fund sales jobs don't look like such a good place to be after all.