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Most Banks Are Screwing Up On Their Stock Picks

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Let’s say that a bank such as Goldman Sachs publishes a recommendation to “Buy Stock X”.

It’s hard to ignore a bet by a powerful investment bank such as Goldman. We are mere mortals in the pecking order, and they are supposed to be the all-knowing smart money from Wall Street.

Do we buy the stock, or is it simply wiser to pass?

Bank Performance Overall

The folks at InterTrader have done considerable legwork to dive deep into the data on investment bank recommendations made in 2015. They looked at every bet made by the 16 top banks throughout the year to assess both potential returns and accuracy.

The results are pretty underwhelming.

If you bought every stock recommended and held until the end of the year, here’s what your performance would look like:

Total performance of investment banks

Overall, when holding the stock picks for the year, banks were only 43% accurate with their predictions.

That’s right – flipping a coin would have been potentially more effective than buying bank stock picks, which ended up down -4.79% on the year. The S&P 500 finished down only -0.69%, but simply just making any interest in a savings account would have been more effective as well.

A Closer Look at Individual Banks

While banks as a whole struggled with picks in 2015, it’s also important to look at banks on a more micro level to see how they performed.

Here’s a look at the recommendations by Deutsche Bank, and how they did:

Deutsche Bank performance

Deutsche Bank nailed 41% of their predictions, and had a -8.93% return if picks were held throughout the year.

As you can see, some of their picks such as Microsoft and Wix.com gained double digits. On the other hand, recommendations such as Whiting Petroleum got absolutely crushed throughout the year, dropping -70.1%.

Overall, Deutsche Bank’s performance here definitely didn’t do much to help the struggling company get out of its rut.

Which Banks Were Most Accurate?

Here are the banks, from best to worst, based on accuracy of their calls:

Most accurate investment banks

Nomura, Credit Suisse, BAML, and Barclays all batted above .500 if stocks were held throughout the year, while 10 banks all did worse than a coin flip.

Citigroup had an off year, only nailing 14% of its picks.

Which Banks Had the Best Returns?

Here are the banks, from best to worst, based on the performance of these recommendations:

Best returns by investment banks

Just two banks, Credit Suisse and Nomura, had positive returns if stocks were held through the year. Meanwhile, Canaccord Genuity’s picks were knocked down -16% over the course of 2015.

An Important Caveat

Throughout the above article, we are showing the results if stock picks were held from when they were made until the end of the year.

However, it is worth noting that the investment banks actually did slightly better if picks were held for shorter durations of time:

TimeAccuracyGains %
30 Days55%0.80%
90 Days49%-1.48%
180 Days42%-3.66%
End of Year43%-4.79%

In other words – if you sold all stock recommendations exactly 30 days after buying, you would have actually made a 0.8% return throughout the year. This is still a lower return than a savings account, but it is an improvement on losing -4.79%!

For a more in-depth dive into the data, we highly recommend checking out InterTrader’s interactive version of the results.

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Banks

The World’s Most Powerful Reserve Currencies

Here are the reserve currencies that the world’s central banks hold onto for a rainy day.

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The World’s Most Powerful Reserve Currencies

When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.

Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.

But network effects don’t apply just to technology and related fields.

In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.

What’s a Reserve Currency?

Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?

In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:

  • To maintain a stable exchange rate for the domestic currency
  • To ensure liquidity in the case of an economic or political crisis
  • To provide confidence to international buyers and foreign investors
  • To fulfill international obligations, such as paying down debt
  • To diversify central bank portfolios, reducing overall risk

Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.

Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.

Reserve Currencies Over Time

Here is how the usage of reserve currencies has evolved over the last 15 years:

Currency composition of official foreign exchange reserves (2004-2019)
🇺🇸 U.S. Dollar 🇪🇺 Euro🇯🇵 Japanese Yen🇬🇧 Pound Sterling 🌐 Other
200465.5%24.7%4.3%3.5%2.0%
200962.1%27.7%2.9%4.3%3.0%
201465.1%21.2%3.5%3.7%6.5%
201961.8%20.2%5.3%4.5%8.2%

Over this timeframe, there have been small ups and downs in most reserve currencies.

Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.

The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.

Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.

Accepted Everywhere?

There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.

While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.

What will the composition of global foreign reserves look like in another 15 years?

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Where the World’s Banks Make the Most Money

Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.

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Where the World’s Banks Make the Most Money

Profits in banking have been steadily on the rise since the financial crisis.

Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits ⁠— the highest total in the sector seen in the last 20 years.

What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?

Following the Money

Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.

Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.

Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.

Banking Profits, by Region

Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.

Banking Profit by Year and Region ($B)

 2009201020112012201320142015201620172018
Global ($B)$388$530$635$703$859$963$1,070$1,065$1,144$1,356
United States$19$118$176$263$268$263$291$275$270$403
China$95$135$174$225$255$278$278$270$301$333
Western Europe$78$34$21-$70$28$95$154$159$186$198
Rest of World$196$243$265$285$309$327$348$361$387$421

In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector ⁠— however, China sits in a very close second place, raking in $333 billion.

What’s Under the Hood?

While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.

The truth is that banking can vary greatly depending on location ⁠— and what drives value for banks in one country may be completely different from what drives value in another.

Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.

CountryRARC/GDPLoans Penetration/GDPMargins (RBRC/Total Loans)Risk Cost Margin
Global Average5.1%124%5.0%0.8%
United States5.4%121%5.0%0.4%
China6.6%147%6.0%1.4%
Singapore13.0%316%4.6%0.4%
Finland3.4%133%2.8%0.2%

1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.

2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:

CountryRetail LoansWholesale LoansLoan Penetration (Total)
United States73%48%121%
China34%113%147%

In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.

3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.

4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.

Future Opportunities in Banking

While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.

Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:

  1. Sub-Saharan Africa
    Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
  2. India and Indonesia
    Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
  3. China
    While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.

A Changing Landscape in Banking

As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.

Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.

Where will the money in banking be in the future?

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