Investment banks are feeling excruciating pain in a critical part of their business

Morgan Stanley, the last of the big five US banks to report third-quarter results, is out with its numbers and one thing is clear.

It was a painful three months for the banks’ fixed income, currencies and commodities – or FICC – divisions.

Morgan Stanley, for example,

reported a punchy $US400 million decline in sales and trading revenue — a nearly 42% drop from a year ago.

The big banks’ FICC divisions, which for so long have powered earnings, have suffered as the debt traders began worrying about economic slowdown.

At Morgan Stanley and Goldman Sachs, the fixed income businesses account for about one-third of investment bank revenue. At JPMorgan, FICC is closer to 40%.

Morgan Stanley attributed the drop to “difficult market conditions for our credit and securitized products businesses.”

That more than offset better results from equities sales and trading and investment banking.

There was a similar story at Goldman Sachs, which last week reported a 27% fall in fixed income, currencies and commodities revenue, excluding accounting adjustments — a drop that contributed to a big earnings miss at the US investment bank.

Citigroup posted a 16% decline, reflecting “lower client activity levels and a less favourable trading environment”, while JPMorgan and Bank of America Merrill Lynch both posted a 11% decline in FICC revenue.

It looks like the pain could continue. On a conference call following JPMorgan’s earnings release, chief financial officer Marianne Lake made a dark prediction for the fourth quarter.

“If markets remain at these levels, Q4 revenue will also be lower” than guidance, Lake said.

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