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Volatility bounce fuels hope for better i-bank revenues after slump in 2017

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Volatility bounce fuels hope for better i-bank revenues after slump in 2017

An uptick in market volatility at the start of 2018 may offer a boost to struggling global investment banks but is unlikely to completely turn the tide after a year marked by plunging revenue.

Subdued markets in 2017 hurt investment banks' fixed-income, currencies and commodities trading businesses in particular, with full-year FICC revenue falling year over year at 11 of the 13 leading global investment banks sampled by S&P Global Market Intelligence. Six recorded double-digit declines, and only Credit Suisse Group AG and Natixis were able to eke out gains.

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Credit Suisse's modest FICC rise was, however, offset by a nearly 20% fall in equities revenue, making it one of the four European banks to see drops in that business line. By contrast, four of the five American banks increased equities revenue year over year.

The picture was even more gruesome in the fourth quarter, when all 13 banks saw year-over-year declines in FICC and overall revenue, and eight also posted equities revenue declines.

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At Morgan Stanley, low volatility affected sales and trading in both FICC, where fourth-quarter revenue fell nearly 45% year over year, and equities, CFO Jonathan Pruzan said on a Jan. 18 earnings call, adding that a consequent decline in client activity hurt fixed income in particular.

Across Europe, banks were hit not only by low volatility but also by the very-low-interest-rate environment, noted Tom Kinmonth, a fixed-income strategist at Dutch bank ABN Amro.

"When you have very low rates, it is difficult to generate money and last year ... outside potentially the elections in France there was not too much volatility. That is the perfect combination to really depress revenues in fixed income," Kinmonth said in an interview. "It'd be a very good test when we see the Q1 results in 2018 for how banks have been able to adapt and generate profit when volatility does appear."

Given the climate in 2017, any increase in volatility in 2018 would be good news, said Octavio Marenzi, co-founder and CEO of Opimas, a management consultancy focused on global capital markets. The rates business within FICC divisions has been a particular beneficiary of a recent rebound in volatility, he said, although he warned that much of this may be a short-term reaction to the U.S. Federal Reserve raising interest rates in mid-December.

"We could see the activity of people rebalancing their portfolios and digesting that increase in interest rates and then, once they have done that, the volume disappears again. So, there is a risk there," Marenzi said. "I expect that fixed-income is not going to do incredibly well in 2018, and will probably follow the … trajectory we saw in 2017."

Opimas is projecting an overall FICC revenue decline of between 18% and 20% in 2018.

A similar claim could be made for the equities business as well, Marenzi said, since most of the trading volume seen in early 2018 "might be just people running for the door," rushing to sell off certain products in anticipation of a bear market. He added that the commissions that banks charge on equities trades have halved in the past five to six years and continue to decline, which has had "a serious effect on business overall."

And what volatility gives with one hand, it may well take away with the other, Marenzi warned.

Investment bank division revenues were the one bright spot identified by research firm Coalition in its latest IB index, rising 10% at a dozen global banks compared to an 11% fall in FICC and a 4% fall in equities. At Goldman Sachs, investment banking revenue rose 44% year over year in the fourth quarter, compared to a 34% fall in FICC and equities revenue.

But a significant chunk of investment bank division activity centers around advising on and arranging IPOs, which tend to fall off when markets are choppy, Marenzi observed.

"Usually in this kind of market, the IPO activity dries up," he said.

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Interested in seeing last quarter's iteration of this piece? Click here.
Click here to view the above and previous quarter charts in a spreadsheet.