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Investment bank Q2 revenues sink as low market volatility hurts FICC


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Investment bank Q2 revenues sink as low market volatility hurts FICC

Fixed-income, currencies and commodities drove down revenue at major European and U.S.-based investment banks in the second quarter, while the equity business fared better thanks to a strong recovery in new issuance.

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Second-quarter FICC revenues dropped at 11 out of 13 investment banks sampled by S&P Global Market Intelligence, with eight booking double-digit percentage drops and Goldman Sachs Group Inc. recording the biggest year-over-year decline at 39.9%, owing to its high exposure to FICC trading.

Goldman Sachs CFO Martin Chavez said on a July 18 earnings call that "it was a difficult quarter on all fronts" with rates, credit, mortgages, currencies and commodities all declining.

He said: "Across many of these products, volatility trended lower in the quarter and clients were less active."

A significant increase in equity issuance resulted in equity revenues rising year over year at nine out of the 13 sampled banks. Groupe BPCE's Natixis booked the strongest year-over-year increase in equity revenues, of 33.1%, as major French banks gained traction thanks to higher activity around the country's presidential elections in April and May. BNP Paribas SA recorded the second-highest growth rate in the S&P Global Market Intelligence sample, of 25.7%, while Société Générale SA's equity revenues were down 0.5%.

Victories by centrist politicians in Dutch and French elections, seeing off challenges from far-right populists, eased uncertainty over the macroeconomic environment and raised retail clients' appetite, particularly in continental Europe, to increase equity exposure, Andrew Formica, co-CEO of asset manager Janus Henderson Group Plc, said in a conference call Aug. 8.

"The biggest uncertainty in Europe has been cleared. The big victory of [French President Emmanuel] Macron and the demise of some of the traditional parties from a political point of view is quite astonishing," Guy Lerminiaux, head of equity at Belgian private bank Degroof Petercam, said in an interview.

"We will have to see what would come out of replacing the establishment with something new, but for now the markets are giving them some benefit of the doubt."

Nevertheless, the improvement in equities was not enough to offset the drop in FICC, with 12 of the 13 lenders in the sample reporting year-over-year declines in second-quarter revenue. The other banks making up the sample are Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley and UBS Group AG.

Investors waiting for market correction

The situation on the debt markets has been "quite stable" over the past quarter, with bond spreads becoming very tight over the past seven to eight weeks, according to Tom Kinmonth, a fixed-income strategist at ABN AMRO focusing on European financial institutions.

"In general it has been quite a positive story," he said in an interview, projecting a relatively stable second half as well with interest rates and loan losses expected to remain low and net interest margins rather stable.

However, "a few cracks started to appear in the financials credit markets lately," after the "major bullish streak" observed in the past few months, Rabobank credit analysts wrote in a research note Aug. 10.

"It looks like spreads have bottomed out for now, with geopolitical events and tapering fears being the catalysts. Only time will tell if this is just a small bump in the road or if it is a start of a larger trend leading to a market correction," the analysts said.

The record low volatility suggests that investors are waiting for a market correction, Lerminiaux said. Although there was "healthy activity," especially in corporate bonds and high-yield bonds, it was in primary markets, while volatility indicators both in the U.S. and Europe have hit very low levels, he said. The same goes for equities, he added.

Global equity capital market issuance surged to $440.6 billion in the first half of 2017, from $335.3 billion a year ago, according to Dealogic's Quarterly Market Review report. This was in large part attributable to an 80% year-over-year jump in IPOs to $87.1 billion. Primary issuance supported equity revenues in Europe, notably a trio of bank capital raisings from UniCredit (€13 billion), Deutsche Bank (€8 billion) and Credit Suisse (CHF4 billion).

Geopolitics are unlikely to cause any major stir in the markets by the end of 2017 as the outcome of the German election in September is quite clear, Kinmonth and Lerminiaux agreed, predicting that the next big event that could impact markets would be an election in Italy due by the first half of 2018.

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