European investment banks’ killer year

0:02Good morning from the Financial Times. Today is Wednesday, February 25th. And this is your FT News Briefing. European investment banks don't seem to hate a bit of chaos. And investors are riding the self-driving wave. Plus, people are returning to Afghanistan in droves. That's not necessarily a good thing for the country. Because the pie is simply not big enough for all these new people coming in. But first, a recap of U.S. President Donald Trump's State of the Union address from last night. I'm Mark Filippino, and here's the news you need to start your day.

0:43USA! USA! USA! USA! USA! USA! USA! USA chants, thunderous applause, boos from Democrats, and even the gold medal winning American men's Olympic hockey team. They all graced the U.S. Capitol building last night as U.S. President Donald Trump delivered his State of the Union address. Trump hit on a number of issues, including tariffs and his frustration with the Supreme Court, which ruled them illegal last week. But Trump said he's confident the individual trade deals he's made will stick. Four of the nine Supreme Court justices were in attendance, as was U.S. Treasury Secretary Scott Besant. But the good news is that almost all countries and corporations want to keep the deal that they already made, right, Scott?

1:28Knowing that the legal power that I, as president, have to make a new deal could be far worse for them, and therefore they will continue to work along the same successful path that we had negotiated before the Supreme Court's unfortunate involvement. Trump also talked about concerns regarding artificial intelligence. Communities across the country are worried about the strain AI data centers are putting on the electrical grid, which can ultimately increase prices for average consumers. The president announced a new, quote, rate payer protection pledge to help address those concerns. We're telling the major tech companies that they have the obligation to provide for their own power needs.

2:11They can build their own power plants as part of their factory so that no one's prices will go up. The president also addressed the economy. Many Americans are struggling with the ongoing affordability crisis, and it's been hurting him in the polls. Last night, Trump blamed Democrats for high prices during former President Joe Biden's administration and pointed to the recent drop in inflation. They knew their statements were a dirty, rotten lie. Their policies created the high prices. Our policies are rapidly ending them. The president's speech came after a massive buildup of U.S. naval and air power in the Middle East.

2:47Trump said America is still negotiating with Iran about its nuclear program, but warned the U.S. will launch a strike unless the regime agrees to curb those ambitions.

3:03European investment banks killed it last year. Barclays, UBS, Deutsche Bank, Societe Generale, and BNP Paribas delivered their highest trading revenues in at least a decade. That's because geopolitical turmoil and advances in artificial intelligence sent markets on a wild ride. Here to tell us more about what this means for the banking industry is the FT's Simon Foy. Hi, Simon. Hi, Mark. So how big of a boom are we talking about here? So in terms of revenues, it was a pretty considerable jump. So if you look across the board at the five banks that we covered, it was more than a 10 % jump on average year on year.

3:40And that is the highest total in at least a decade from the data that we were looking at. And I suppose if you put that into context, it was even higher than 2022, which was seen as a really exceptional year for trading desks when Russia's invasion of Ukraine caused central banks to rapidly increase interest rates. So it even surpassed that. Simon, what volatile conditions caused the trading revenues of these investment banks to flourish last year? So if you look back at last year, the first half was very volatile and a lot of it had to do with Donald Trump coming back into the Oval Office in January of that year and the uncertainty around his economic agenda.

4:18You saw again in early April a big spike when he slapped tariffs on sort of key trading partners of the U.S. And then as the second half progressed, it certainly plateaued and leveled off a bit. But you also had this big bull run on tech companies associated with AI. And actually, as we've gone into this year, you've seen sort of more gyrations in sort of equity markets as investors call into question sort of how AI will impact certain companies. And can you explain a little bit more about how these fluctuations in the market ultimately benefited the banks? Sure. So these trading desks generally like volatility because it increases things like client activity.

4:58It increases the opportunities that traders have to take advantage of. So during these periods of fluctuations, client activity is higher as hedge funds look to exploit market dislocations. Then you have asset managers and pension funds looking to rebalance their portfolios. And then corporate sort of businesses stepping up hedging of things like interest rates, foreign exchange and commodities. And so that's obviously the trading side that we're looking at here. But the opposite is generally true for the other sort of advisory and capital market side of the investment banks because it disrupts areas like dealmaking, sort of IPOs get pulled, M &A slows, and debt issuance becomes more difficult.

5:36So while it is very much a positive for the trading part of the investment banks, it's not exactly true for the other side of the investment bank. Okay, so these banks benefited from the market chaos last year. There could be more chaos on the horizon. You know, we've been talking about the AI bubble potentially bursting and, you know, tech and software stocks have come under fire lately. What kind of risks do these banks face? Yeah, so definitely more volatile markets increases risk for banks. So their profitability depends heavily on proper risk management and positioning. So there's that. And yes, there's a risk that asset valuations potentially become stretched.

6:13And in the piece, I quote one senior investment banker who cautioned that to him that markets looked increasingly frothy, citing sort of huge investments in AI and data centers. And he added that even some bankers desire to, what he said, get on the runaway train and not worry about the future, reminded him of the years that preceded the 2008 financial crisis. So not everyone is totally bullish on where this goes next. Given that attitude, what's the outlook for European investment banks in 2026? So the consensus at the moment is that 2026 will not be as strong a year as last year for the trading desks of these investment banks.

6:51And as I was saying, so the second half of the year last year, revenues plateaued a bit compared with the first half as volatility eased. And you speak to analysts in the market and they expect that to moderate further as this year progresses. But I suppose the other side to that is this time last year, not many people predicted Trump putting tariffs on key trading partners, which obviously triggered huge dislocations. So who knows? There still might be more uncertainty to come. Simon Foy is the FT's European banking correspondent. Thanks, Simon. Thanks, Mark.

7:28The UK self-driving startup Wave has a bunch of new money from some big names. It raised$1.2 billion in fresh funding, and its investors include Mercedes-Benz, Stellantis, and Nissan. This funding round makes Wave one of the UK's most valuable AI startups, and it's the first time the company has raised capital from the automotive industry since it was founded in 2017. Wave is gearing up to launch its first robo-taxi service in London later this year, but it won't be alone. The company is going to be competing against Waymo, which is owned by Alphabet, and has a valuation more than 14 times that of Waves.

8:10People are returning to Afghanistan in droves. That's a huge change for a country ravaged by half a century of continuous war that caused natives to flee. Millions have moved back to the country from Iran and Pakistan over the past year, with more to come. But there are questions over whether the country can support this massive influx of people. Here to talk about this is the FT's Hamza Jelani, who just got back from Jalalabad in Afghanistan. Hi, Hamza. Hi, it's great to be here. Thank you for having me. So why are people flocking back to Afghanistan, Hamza? Well, since the Taliban took over in Afghanistan in 2021, Pakistan and Iran have started emptying their populations, started expelling millions of Afghan refugees that they've hosted for the last 40 years or so.

8:56So in Pakistan, there's a mix of the argument that many of these people are undocumented, or the paperwork that they had as refugees are no longer valid. There's the argument that Afghanistan is now technically no longer at war and is a safe place, even if it's run by the Taliban. And they are also launching accusations that Afghan refugees are involved in drug trafficking and terrorism. There's been an upswell of xenophobia against Afghans who've been hosted in Pakistan. And in Iran, the story is pretty similar. After the 12-day war with Israel in June, many Iranian officials started saying that Afghan refugees were responsible for espionage.

9:35And in just the span of a few weeks, they expelled hundreds of thousands of Afghans back to Afghanistan. And they've scaled up those deportations as well. What's the economic effect of these people coming into the country? Well, Afghanistan, though technically at peace, has still been devastated by the four decades of war that it's experienced. It's among the poorest countries in the world. It's just simply not a strong enough economy to absorb what's actually five million new people in two years. So these returnees are coming in and they're spending a lot of money to buy, you know, basic goods like food, like diapers for their children.

10:12They're enrolling in schools and buying supplies. They're building homes. So there has been a surge of spending happening that has lifted the GDP. But this 4 % increase in GDP is happening against a 12 % increase in population in two years. So actually, at a per capita level, people are becoming poorer because the pie is simply not big enough for all these new people coming in. There are many people who are skeptical that the Taliban have the resources to help welcome these people, especially as they've lost access to at least a billion dollars of aid every year with a dismantling of USAID, which was about one third of the total aid that came to Afghanistan.

10:52And aid as a whole is the majority of the government's budget. Are the returning refugees able to contribute to the economy? Any conversation of the Afghan economy has to take into account that the Taliban government has introduced very draconian restrictions, particularly on women. So girls are not allowed to attend school past the sixth grade. Women are barred from most jobs that are outside the home and can only work in gender segregated workplaces with very few exceptions to that rule. So as a result, what you do have are women who are better educated in many ways than women in the communities that they're returning to.

11:29The reason being that Pakistan and Iran were relatively more stable. They have more liberal education systems. And we've also found that many of these returnees have college degrees or educated, that they're bringing a level of knowledge and skills that could benefit the Afghan economy. But this is an incredibly poor economy that is still largely subsistence rural. And then there are still economic sanctions that are affecting specifically the Taliban leadership, but have a chilling effect on financial access for the rest of the population. That's the FT's Hamza Jelani. Thanks, Hamza. Thank you.

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