Operating and Financial Review

Economic Environment

Global economic growth is expected to have accelerated in the third quarter of 2014, primarily thanks to stronger momentum in industrialized countries. Real GDP growth in the seven largest industrialized countries is likely to have increased compared to the prior quarter on an annualized basis from 1.7 % in the second quarter 2014 to 3.0 %. Economic activity in the eurozone is estimated to have picked up slightly in the third quarter 2014, after stagnating in the second quarter, and the German economy probably accelerated again, after it had slowed by 0.6 % on an annualized basis in the second quarter 2014. However, with some weaker data points over the course of the third quarter 2014, uncertainties over the near-term outlook for growth in the eurozone have risen somewhat.

Following strong growth of 4.6 % in the second quarter, economic momentum in the U.S. is likely to have let up slightly in the third quarter 2014. After experiencing a 7.1 % drop in the second quarter 2014 on an annualized basis, mostly due to the consumption tax increase, the Japanese economy is estimated to have expanded by 2.4 % in the third quarter 2014.

In China, economic growth slowed to 7.3 % year-on-year in the third quarter mainly due to weaker property investment. In Russia, purchasing manager survey results point to somewhat stronger growth in the third quarter 2014.

In Europe, lending to the private sector moderately declined further in the third quarter 2014, with deposit growth staying robust. Again, Germany outperformed the euro area as a whole both in retail and corporate lending, yet could not decouple from the overall weak environment. Banks in Europe continued to become slightly more confident with regard to business prospects and total assets also ticked up a bit. At the same time, banks’ uptake of the ECB’s new targeted long-term refinancing operations to support lending to the real economy remained modest so far.

In the U.S., lending growth remained brisk, especially with the corporate sector. Consumer lending was also buoyant, but residential mortgage volumes on banks’ balance sheets broadly stagnated with securitization activity also substantially below prior year levels. However, sluggish borrowing to fund housing may largely be due to a still high share of cash-financed transactions rather than a weak real estate market. Deposit growth at U.S. banks slowed somewhat yet was still healthy.

In investment banking, the traditionally weak summer quarter came in as the strongest third quarter since the start of the financial crisis. Compared with a year ago, equity issuance boomed and M&A activity was also up substantially, leading to a surge in related revenues. Debt issuance was up slightly and syndicated lending remained about flat, resulting in more or less stagnating revenue flows in these segments. Trading volumes were broadly comparable to the same period in 2013.

In asset management, banks may have benefited from the moderately higher market volatility, while equity markets still remained close to record levels or even reached new all-time highs. Europe underperformed Asia and the U.S., despite a significant depreciation of the euro. European bond markets, however, climbed further and yields fell again to record lows –10-year Bunds, for example offered investors less than 1 % p.a. for the first time in their history.

Litigation expenses and regulatory settlements continued to be a considerable burden for global banks, with several individual banks’ settlements setting new records for corporate fines in the U.S.

In terms of policy, regulation and supervision, the third quarter 2014 was marked by the new European Commission taking shape, by the balance sheet review and stress testing of large euro-area banks proceeding and by the U.S. authorities announcing their intention to raise capital requirements for systemically important institutions even farther than agreed to internationally under the Basel 3 accord.