Wall Street’s heavyweights wasted no time pouncing on Credit Suisse’s prime brokerage pain
No Time #NoTime
The Archegos debacle began rearing its head at the end of March, and within weeks, it became clear Credit Suisse was staring at more than $5 billion in losses and its prime brokerage business – the epicenter of the fiasco – was on the chopping block.
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The lions of Wall Street wasted little time before pouncing.
In quarterly earnings calls this week – less than three months since the Swiss bank announced it was gutting its hedge fund lending business by a third – JPMorgan, Morgan Stanley, and Goldman Sachs each reported records in their prime brokerage units.
JPMorgan on Tuesday credited its 13% uptick in equities revenues first and foremost to all-time highs in client balances in prime, while Goldman reaped $815 million in equities lending revenues as it hit record average balances in its prime business, according to earnings call transcripts compiled by Sentieo, a financial data provider.
Morgan Stanley on Thursday said its average balances also hit a new high, and that increased prime brokerage revenues offset declines in its cash and derivatives business lines.
While Morgan Stanley CEO James Gorman briefly mentioned industry consolidation, Goldman execs offered the most explicit insight into their prime brokerage boon.
When Evercore analyst Glenn Schorr asked about the firm’s booming prime fortunes, as well as the Archegos fallout, Goldman CEO David Solomon confirmed they’d seen the opportunity to pick up new clients, as well as “to be more profound with our existing ones.”
“You’ve obviously seen open expressions by other firms who are looking to reduce down their prime business. We’re going the other way. We want to grow that business,” CFO Stephen Scherr also said on the call, adding that “clients in motion around prime” were flocking to Goldman as well as others.
Both executives underscored that the growth was judicious and “prudent” around pricing and term structure.
Indeed, other firms are hoovering up prime business, too. Prime brokerage professionals told Insider that an array of brokers accrued prime balances from Credit Suisse – though evidently not enough to hit record levels that warrant an earnings disclosure.
Moreover, the dust is still settling at the Swiss lender, and competitors will pick up more business over the next two months as Credit Suisse continues to unwind its book, sources said.
Citigroup, a smaller prime player, acknowledged growth across its equities business when it reported results on Wednesday. But in a call with news media, CFO Mark Mason added more color, saying he expected growth in derivatives and prime finance to continue “as others retract from the space.”
“I think we’re well-positioned to gain there,” he added.
The pain at Credit Suisse – and Nomura, which is also retreating from its prime business amid a $2.9 billion Archegos hit – isn’t the only groundswell driving prime revenues at big banks. Hedge funds, flush with cash and soaring equity prices, and buoyed by low interest rates, are borrowing more in aggregate.
The world’s premier hedge funds have produced monster profits over the past year; their fattened wallets and frothy returns mean they can add leverage.
Banks can only grow their prime businesses so much before bumping into regulatory hurdles and constraints on resources and capacity, but thus far the confluence of events in prime brokerage this year has amplified the multi-year trend of increasing market share among the top firms.
According to data from Wall Street consulting firm Coalition Greenwich, the top-3 banks accounted for 39% of the industry’s global prime services revenues in 2011. That share has grown over the past decade, topping out at 48% at the end of 2020.
Morgan Stanley, JPMorgan, and Goldman held a substantial lead over the rest of the Street even before their recent gains. The middle-tier players – Bank of America, Citigroup, UBS, Barclays, and BNP Paribas – will battle for the business fleeing Credit Suisse and Nomura, but the prize will remain a distant fourth place.
This story has been updated to add Morgan Stanley earnings results.