Commodities and foreign exchange traders endured their worst first quarter in more than a decade, as they were left out of a double digit surge in revenues across the world’s biggest investment banks.
Revenues from commodities fell 29 per cent year on year at the top 12 investment banks and revenues from trading currencies dropped 25 per cent amid lower volatility and volumes, according to new data from industry monitor Coalition. In both cases, total revenue was at the lowest level since 2006.
However, overall investment banking revenue at the 12 banks jumped 14 per cent, powered by increases in other parts of fixed income trading and in fees for advising clients on raising debt and equity. Still the combined $42.4bn total remains well below revenue levels earlier in the decade.
The Coalition figures help explain why Goldman Sachs failed to share in a first-quarter rebound enjoyed by its Wall Street rivals in the first quarter — it cited weakness in commodities as one of the reasons why it missed expectations.
Regulatory changes have prompted most banks to scale back their commodity trading businesses, leaving Goldman and Morgan Stanley with the largest remaining exposure, said JPMorgan analyst Kian Abouhossein.
He added that he did not expect revenues from commodities or foreign exchange trading to pick up in the second quarter. Trading revenue in both activities is dependent on the level of volatility in the market, which inspires clients to trade more and allows banks to earn higher margins.
“Volatility has further declined on a quarter on quarter basis, there are not a lot of trigger events in the market which would lead to an increase ” in volatility, he said. The UK’s Brexit vote delivered a surge in foreign exchange volatility in the second quarter of 2016, as did the US presidential campaign in the second half of the year.
Cash equities traders also had a tough start to the year, with revenue down 18 per cent, according to Coalition data, but that market has improved. “We have really seen a change in direction,” said Mr Abouhossein. “Cash equities are suddenly performing better than equity derivatives, with transaction volumes up significantly in the EU . . . Markets are higher as well which helps in Europe.”
George Kuznetsov, Coalition’s head of research, said one of the biggest surprises of the first quarter was a boost in revenues that banks earned from advising clients on initial public offerings and other equity raising activities. Equity capital markets were up 97 per cent in the first quarter.
Mr Abouhossein said new data from Dealogic suggested that the trend was continuing in the second quarter, with ECM revenue up 34 per cent to date
Other parts of banks’ advisory business are doing less well. Debt capital markets, which enjoyed a 41 per cent rise in revenues year-on-year in the first quarter, according to Coalition’s data, is down 11 per cent so far in the second quarter, according to Dealogic. M&A fees, which were down 2 per cent at the first quarter mark, are down 6 per cent so far in the second quarter.
Coalition’s figures show that credit revenues rose 65 per cent in the first quarter of the year. Mr Kuznetsov said credit was one of the areas where revenues were returning to their “historical norms”. In absolute terms, the first quarter’s $4.7bn revenue was on par with the $4.7bn in the first quarter of 2015, and well below the $7bn-$7.2bn for the first quarter of 2012-2014.
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