Banks still struggling to make money in the bond market

The Thames Barrier is seen across the River Thames with the Canary Wharf business district seen in the background in London
The Thames Barrier is seen across the River Thames with the Canary Wharf business district seen in the background in London September 7, 2014. REUTERS/Toby Melville

November 6, 2015

By Jamie McGeever

LONDON (Reuters) – Banks struggled again to make money trading bonds, currencies and commodities in the third quarter, as regulatory changes squeezed liquidity and intensified the pressure to cut costs, staff and activity.

Revenue and profit fell for most of the world’s major trading banks in the three months to September, and the outlook for next year points to further declines, especially in Europe.

Revenue plunged at some major U.S. institutions, too, but most are in better shape than their European counterparts. They are expected to continue gaining market share in fixed income, currency and commodities (FICC).

FICC trading revenue at 13 of the world’s biggest banks was $16.8 billion in the third quarter, according to data analysis firm Tricumen. That was down almost 20 percent from $20.86 billion the same period a year ago.

The conundrum they face is how much further they can cut before losing market share. Cost cuts are likely to target specific areas of their trading.

“Traders’ life was made easy for a long time. Those days have come to an end. The question is who wants to be market maker to all men,” said Peter Hahn, senior lecturer in finance at Cass Business School.

“Investment banks’ main trading partners over the last 20 years have been other financial institutions. So the revenue potential has been reduced. The landscape has changed,” he said.

According to Morgan Stanley analysts, FICC revenues this year across U.S. and European banks will be $82 billion, down from $88 billion last year, and they expect the trend to continue. Weakness in Europe will lead to a decline to $80 billion next year and $77 billion in 2017. In 2009, global FICC revenues were $157 billion.


Post-crisis regulatory changes are forcing banks to hold more capital and liquidity, effectively making them less able to trade. The reduction in market-making is drying up broader market liquidity. Against this backdrop, banks are unlikely to expand FICC trading anytime soon.

Seven years after the crash, banks are still struggling to adjust, although U.S. banks are a few years ahead of Europeans in cleaning up balance sheets and operations, analysts say.

The three-decade bull market in bonds could be near an end, too. Global interest rates and bond yields are at all-time lows – and in some cases negative – and the Federal reserve is close to raising U.S. rates for the first time since June 2006.

Even at banks where FICC trading held up in the third quarter, the outlook isn’t rosy. Deutsche Bank’s FICC revenue rose 20 percent, but it is exiting some products, including “market making in uncleared Credit Default Swaps, certain legacy rates products and agency residential mortgage-backed securities.”

Germany’s biggest lender recorded a 6 billion-euro loss in the quarter, scrapped its dividend for the first timer and said it would ax 15,000 jobs.

Credit Suisse said it will shed 1,600 jobs in Switzerland over the next three years and cut investment banking staff in London. It will also reduce activities in its “macro” business – effectively FICC trading – by the end of this year.

Standard Chartered said it would slash 15,000 positions, and last year Barclays said it would shed 19,000 jobs.

However, FICC losses are likely to be mostly back office and support jobs, not front-line trading, said George Kuznetsov at financial industry analytics firm Coalition in London.

Further pruning would render many desks unable to support client demand for trading services. European banks in particular are aware of this and how aggressive the big U.S. banks have been in grabbing FICC market share.

“Banks – especially Europeans – are soul-searching around businesses which aren’t core to their client franchise and product strengths, or fail to meet increasingly stringent capital requirements,” Kuznetsov said.

(Reporting by Jamie McGeever)