Investment banks have had a horror show in one of their biggest business lines.
Credit trading desks, which sit inside fixed income units, have had a terrible run this year. Revenues are down, bonus pools have been wiped out, and traders are trying to move on.
Revenues for the business line at the top ten banks are forecast to be down as much as 35% in 2015, according to Paul Johny, a director of research and analytics at Coalition.
That would represent a drop of close to $US9 billion. Credit trading — which encompasses bonds, distressed debt and credit default swaps — generated $US25 billion in 2014, according to Coalition.
The situation deteriorated in the third quarter as credit spreads widened as investors began to worry about risks to global economies. UBS said in a note on Wednesday that there were “clear signs of contagion in credit markets”, as reduced liquidity and the elevated level of stress in commodity-related companies led to selling pressure.
Higher spreads means bonds prices are falling, making for difficult trading conditions and potential mark-to-market losses on bank trading books.
The weakness in the business is likely to cast a pall over third-quarter earnings season, which JPMorgan will kick off on October 13. Banks don’t typically break out the performance of their credit divisions within the fixed income revenue line, but often mention it on earnings calls and presentations.
“From a very big picture perspective, the single biggest factor in predicting the direction of FICC revenues is what is happening to credit spreads,” Guy Moszkowski, managing partner at Autonomous Research US, told Business Insider.
Now traders are trying to get out: 43% of those working in credit sales and trading said they would choose a different occupation, according to a survey of traders above vice-president level at US banks carried out by recruitment firm Options Group between August 18 and September 10.
Close to one third said year-on-year performance was behind target. In comparison, 23% of those working in rates sales and trading said they would choose a different occupation, while 15% said they were behind target.
Distressed debt trading has taken the hardest hit, with revenues across the biggest banks down around 65% in the first six months of the year, according to Coalition. The distressed business made $US3.7 billion in the first half of 2014, according to Coalition estimates, but just $US1.4 billion in the first half of 2015.
That was before a number of banks took a series of hits in the third quarter. Goldman Sachs has been particularly hard hit in the distressed-debt trading space. Bloomberg reported in August that the bank had taken a $US50 million to $US60 million hit as a result of a series of bad bets.
The team has also seen a number of departures. Business Insider reported last week that the bank has hired Adam Savarese, a big name trader at Morgan Stanley, to join its distressed-debt trading desk as a partner.
Jefferies has also taken a hit in distressed trading. Chairman and CEO Richard Handler and Brian P. Friedman, chairman of the Jefferies’ executive committee, said in a letter last month that the bank had recorded losses totaling $US90 million over the last nine months across more than 25 distressed energy positions.
“It is not that surprising that you are seeing some turmoil on credit desks broadly, and it has generally been true that Goldman has been more exposed to credit than macro flow business [such as rates trading and foreign exchange],” Moszkowski at Autonomous said.
“You add that to a widening in high yield, and the fact that some of the distressed bets were made were in the energy space, which is where there has been the most damage, it isn’t that surprising that revenues are down.”