U.S. group Morgan Stanley, Switzerland-based UBS Group AG, and German peer Deutsche Bank AG recorded the steepest year-over-year declines in second-quarter trading revenues among the top global investment banks, according to S&P Global Market Intelligence data.
The quarter was weak across the board with 10 of the 13 global investment banks in S&P Global Market Intelligence's sample posting lower overall revenues compared to a year ago. The sample also includes Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., HSBC Holdings PLC, JPMorgan Chase & Co., Société Générale SA and Natixis.
Equities trading revenues declined on a year-over-year basis at 11 of the 13 banks, while revenues from trading in fixed income instruments, currencies, and commodities, FICC, were down at seven banks in the sample.
Challenging backdrop
Morgan Stanley and UBS recorded bigger year-over-year drops in second-quarter FICC revenues, while Deutsche Bank's equities trading was the main driver of the overall revenue decline. As part of its latest restructuring attempt, the German group plans to close its equities trading business. This will have an effect on investment bank revenues in the third quarter but should be offset by other products, CFO James von Moltke said at a banking conference Sept. 9.
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Morgan Stanley's FICC business suffered a blow in the second quarter as a result of the more challenging macroeconomic backdrop, the sharp move in U.S. interest rates and persistent low volatility, CFO Jonathan M. Pruzan said at the group's earnings presentation in July. Despite a year-over-year drop in equities revenues, Morgan Stanley saw a bump on a quarter basis, retaking its leadership position in that segment, Purzan said. The bank expects to be No. 1 globally, he added.
"We are still operating in an environment with low volatility and trade volumes in equities and [foreign exchange]," UBS CEO Sergio Ermotti said in a comment on second-quarter market performance. Moreover, the continued global geopolitical and macroeconomic uncertainty are weighing on both sentiment and economic prospects, the CEO said at the group's earnings presentation.
Equities 'on a roller-coaster ride'
The weakness in equities was notable over the first half with revenues dropping across products. Apart from a few bright spots, global revenues weakened in cash equities, equity derivatives and prime services, especially in Europe, the Middle East and Africa, financial market research firm Tricumen said in its quarterly capital markets review. "However, costs did not change much and, as a result, year-to-date aggregate profits plunged, particularly at EMEA banks," the firm said.
This margin compression coupled with low client demand was the main reason for the lower revenues in cash equities and prime services, in particular, research firm Coalition noted in its latest investment banking index.
"After the best start to the year in nearly three decades, global equity markets have been on a roller-coaster ride lately as political and trade uncertainties are keeping markets on their toes," Swiss bank Julius Bär said in its third-quarter market outlook. However, "the fundamental backdrop remains constructive for equity investors," the bank noted, suggesting there may be some upside in the coming months.
After a "steep fall" in May driven by worries over the escalating trade tensions between the U.S. and China, stock markets started rebounding in June as global central banks signaled further easing of monetary policy and some of the global trade fears dissipated, investment firm Schroders said in its quarterly market review.
Rates, forex weigh on FICC
On the FICC side, although the overall decline was smaller than that in equities, first-half revenues across products were lower than a year ago, according to Coalition. G-10 rates, emerging markets macro, and G-10 foreign exchange products were most affected, the firm said. Government bond revenues were boosted by the increasing dovishness of central banks in June but this was offset by a drop in swaps revenues, according to Coalition's and Schroders' analyses.
"With the market anticipating policy easing, 10-year yields have declined to around 2%, a considerably lower level than where they started the year," investment firm MFS said in a quarterly capital markets review. "Expectations of tepid U.S. economic growth, low inflation rates and ongoing trade tensions appear likely to keep yields contained," the firm said.
Low volatility was the key driver for the weakness in forex, according to Tricumen. The firm noted that markets "seem too calm" regarding the potential swings the U.K. pound could face in the future ahead of the looming Brexit deadline. Although it rose during the summer, the CBOE's volatility index remains well below its November 2018 and March 2019 peaks, the firm said.
While sterling remains prone to Brexit-related volatility, the U.S. dollar is likely to weaken more than other developed market currencies as the Federal Reserve's easing "has steepened more rapidly than peers," Goldman Sachs Asset Management said in its latest Market Pulse analysis.
The decline in emerging markets macro was due mainly to underperformance in emerging markets rates with lower revenues in Argentina, Turkey and China underlying products in particular, Coalition said.

