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 third-quarter hits – to leave equities with a larger slice of the trading pie – as concern over a scaling-back of US 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 $2.5bn (€1.83bn) after lower client activity in a "subdued" and "difficult" trading environment.
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.
Kinner Lakhani, European banking analyst at Citi, said: "We expect fourth-quarter 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."
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 $11bn into 2015, while FICC revenues will fall $2bn, 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.
Numbers from Deutsche, UBS and Credit Suisse suggest trading revenues dropped $2bn quarter-on-quarter, based on current exchange rates, Reuters calculations show.
Barclays and BNP both noted weakness in fixed income. (Reuters)