Deutsche Bank and Barclays hit hardest by fixed-income falls

Deutsche Bank and Barclays are expected to emerge this week as the biggest European casualties of the fixed-income trading slump that dogged US banks’ second-quarter earnings, but analysts do not believe the situation is serious enough to merit swingeing cutbacks at either institution. 

The big five Wall Street banks reported an average fall in fixed-income trading revenue of 17 per cent for the three months to June compared with the same period a year earlier, ranging from a 40 per cent fall at Goldman Sachs to a drop of just 4 per cent at Morgan Stanley, which took an axe to its fixed income, currencies and commodities (FICC) division in late 2015. 

The US banks cited the low volatility that persisted for most of the second quarter as the main cause, when an absence of market turbulence meant prices stayed steady and clients had no incentive to trade. Goldman also admitted it had navigated the commodities market poorly. 

Kian Abouhossein, banks analyst at JPMorgan, said Deutsche Bank, which reports second-quarter earnings on Thursday, was the most exposed of the European institutions to the trading slump since it made almost 60 per cent of its investment bank revenue from fixed-income trading.

Barclays, which reports its results on Friday, is next in line, earning 44 per cent of its investment bank revenue from FICC, according to JPMorgan’s estimates.

“There was a very clear trend [in the US results],” said Mr Abouhossein. “Fixed income was disappointing, equities surprised on the positive side, so the overall message is that equities is the place to be.”

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This augurs well for UBS, which cut its fixed-income franchise deeply in 2012, and Credit Suisse, which reduced fixed income under its 2015 restructuring plan.

Both Swiss banks report earnings on Friday.

In a note to clients last week, Citi analysts wrote that the Swiss would also benefit from improved net interest margins in their large private banks, as “cross-border outflows abate and the banks reap the benefit of higher interest rates in the US”.

Even though the US bank results left analysts expecting Deutsche Bank’s latest quarterly fixed-income revenue to be down more than 30 per cent compared with the same period last year, Mr Abouhossein stressed that there was “nothing structural of concern” in the fixed-income market. 

“Public data shows us that it is basically one of the worst ever volatility environments for rates we’ve ever seen. It’s the same for foreign exchange,” he said.

He believes the pendulum will swing back in September, when the Fed eases off on its quantitative easing programme and markets become more active. John Pruzan, chief financial officer at Morgan Stanley, told the Financial Times that FICC had begun to pick up in the final weeks in June. 

Chris Wheeler, banks analyst at Atlantic Equities, also does not believe that banks will be pressed for big cuts as a consequence of poor results in fixed income in the second quarter. “I sense the [interest] rates business has been addressed by those that needed to,” he said. He added: “The big question seems to be around commodities.”

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JPMorgan boss Jamie Dimon might agree. His bank posted a 19 per cent fall in FICC revenue in the second quarter, the second worst performance on Wall Street after Goldman Sachs.

Asked by reporters what he would do to adapt to the changing environment, Mr Dimon said: “I’m not going to change a thing.”