This past quarter has been terrible for investment banks’ fixed income, currencies and commodities trading arms.
The so-called FICC business has been a key driver of investment banking revenues in recent years, but a new note from Huw Van Steenis and his team at Morgan Stanley shows the extent to which that business is now struggling.
Morgan Stanley estimates FICC revenues “may be down 10-25%” year-on-year in the third quarter for European banks, led down by volatility in the credit markets.
While one bad quarter alone might not worry managing directors at investment banks, the medium term trend will.
Morgan Stanley has a chart showing the steady decline of the FICC business from a $US157 billion (£104 billion) powerhouse in 2009 t0 almost half that by 2017:
Credit trading — which includes bonds, distressed debt and derivatives such as credit default swaps — is the main culprit for the decline in FICC.
The value of corporate bonds have dropped, and credit spreads have widened, as investors have grown increasingly concerned about companies paying back their debt piles amid sluggish global growth, a Chinese slowdown and the prospect of an interest rate hike from the US Federal Reserve.
As my US colleague Matt Turner reported earlier, credit traders themselves are trying to get out of the business. Around 43% of those working in credit sales and trading said they would choose a different occupation. That’s 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.
Overall, Morgan Stanley sees trading revenues diving at the major investment banks this year, with only Barclays growing slightly. Might be time to save, rather than spend, that bonus come 2016: