Europe's leading investment banks took a trading revenue battering in the third quarter that shows no signs of reversing before the end of the year and gives a glimpse into the upheaval facing the industry as a whole.
The combination of a regulatory drive to make markets less risky, a reduction in banks trading for their own account and the end of a 30-year bull market in fixed income is forcing all banks to rethink their operations and, in most cases, shrink.
Fixed income and currency desks took the biggest Q3 hits, to leave equities with a larger slice of the trading pie, as concern over a scaling back of U.S. stimulus crimped volumes, scuppering a tentative rebound seen at the start of the year.
Deutsche Bank, UBS and Credit Suisse reported a collective drop in trading income of around $2.5 billion after lower client activity in a "subdued" and "difficult" trading environment.
BNP Paribas and Barclays also reported double-digit percentage drops in revenues from their fixed income businesses, a weaker trend begun by U.S. banks such as Goldman Sachs and JPMorgan.
While revenues normally take a seasonal dip in the third quarter, most of the banks also saw a drop year-on-year, as the slide was exacerbated by economic and political uncertainty.
"We expect Q4 trading to be more of the same. It's seasonally the weakest quarter for FICC (fixed income, currencies and commodities) as sales and trading desks typically take a lot of risk off from mid-November in the context of lower liquidity," said Kinner Lakhani, European banking analyst at Citi.
Beyond seasonal trends, regulation and de-risking of bank balance sheets are set to further pressure FICC in the long run.
Stock trading revenues at the top 11 global investment banks are set to rise $11 billion into 2015 while FICC revenues will fall $2 billion, leaving the market as a whole much smaller than at its pre-crisis peak, according to UBS research.
FICC units are particularly vulnerable to the sweep of regulatory change to make markets more transparent and banks take less risk, in a bid to prevent another financial crisis.
Part of that involves forcing more deals on to exchanges, pressuring margins, particularly in FICC units, which rely on bespoke deals, and this has jump-started a retreat by banks from areas where they do not have a dominant position.
"There is a swing (from FICC to equities) ... but the margin on trading equities is lower, so if all of these big guys want to be equity traders, there won't be enough equity for them to trade," said Arun Melmane, banking analyst at Canaccord Genuity. "So some will win and some will lose."
UBS data showed the top investment banks saw a 20 percent slide in FICC and 47 percent in equities between 2006-7 and 2012, contributing to a revenue pool of around $300 billion, of which FICC accounts for more than half.
Although banks report in different ways, amalgamating numbers from Deutsche, UBS and Credit Suisse suggests trading revenues dropped $2.5 billion quarter-on-quarter, based on current exchange rates, Reuters calculations show.
Barclays and BNP both noted weakness in fixed income and a stronger year-on-year showing in equities.
In European equities, volumes traded on the FTSEurofirst 300 index dropped 8 percent in July to September, their first quarterly drop this year and the second quietest three-month period since 2006, according to Thomson Reuters data.
Fixed income suffered more, as trade in German government debt fell 21 percent, the steepest quarterly fall in nearly two years. Cash corporate credit volumes fell 16 percent in the third quarter, Tradeweb said.
Average daily currency trade fell 7.6 percent in the third quarter from the second, data from CLS Bank, which operates the largest foreign exchange settlement system, showed.
Hopes for a marked reversal of that trend in the fourth quarter look slim given daily volumes in both bonds and stocks in October are running below their January to June average, hit by a U.S. government shutdown.
While Tradeweb and CLS gave no October numbers, a spot trader at a large European bank in London said foreign exchange volumes were "anecdotally down 20-30 percent."
A tailing off in volatility as central bank monetary largesse limited price moves contributed to those lower volumes and reduced demand for some stock and bond derivatives.
While that is likely to broadly remain the case into 2014, market concern about the impact of an eventual reduction in stimulus globally is likely to keep trading volumes in check.
In addition, UBS said in its results statement, client demand to trade could also be held back by unresolved issues from the European sovereign debt crisis, the health of the region's banking system and a mixed outlook for global growth.
"This would once again make improvements in prevailing market conditions unlikely, and would consequently generate headwinds for revenue growth, net interest margins and net new money," they wrote.
© 2022 Thomson/Reuters. All rights reserved.