Lower FICC Revenue Hits Top 10 Investment Banks

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Revenue at the top ten investment banks slipped 5% in the first half of 2014 due to weakness in their currency, fixed income and equities businesses which were partially offset by strength in commodities and M&A activity, according to a new report released recently.

Primary Areas of Weakness

According to a report published last week by UK consulting firm, Coalition, weak FICC revenue hit the world’s 10 largest investment banks depressing their 1st half revenue 5% to $82.3 bln from $86.8 bln during the same period last year.

Revenue from these banks’ fixed income, currency and commodities divisions fell 13% during the first six months of the year, primarily as a result of a massive 35% drop in currency trading revenue during the first half.

In addition, revenue from these large investment banks’ equity-trading businesses declined 4% year over year to $21.6 billion, driven mainly by decline in derivatives.

Weakness in these banks’ FICC divisions was a result of several challenges – including extremely low volatility in the financial markets, as well as government regulations mandating higher capital levels against risky assets. The lower returns from these liquid capital accounts have effectively depressed banks’ earnings.

A Few Strong Divisions

Fortunately, the world’s ten largest investment banks saw increased revenue from a few divisions, including commodities and mergers and acquisitions.

For example, commodities revenue surged 21% in the first half of this year when compared to the same period last year.  This was a result of a pickup in U.S. power and gas trading which benefited from the prolonged cold winter last year.  In addition, renewed investor interest in commodities helped buoy revenues in this segment.

Investment banking revenue also posted a 21% year-over-year increase due to a rebound in M&A activity and a surge in IPOs so far in 2014.  M&A volumes reached their highest level in seven years during the six months ending June 30th, 2014, while equity capital markets activity rose 16% in the first half.

How The Banks Are Responding

As a result of the overall weakness seen in revenues so far this year, a number of investment banks, including Barclays, Deutsche Bank and UBS have all focused on cost cutting as a way to address shrinking margins.

This has particularly taken the form of lay-offs and pay cuts.  According to Coalition’s research, the ten largest investment banks have reduced front office jobs by 4%, job cuts in the battered FICC division have totaled 9%.

The continued weakness in revenues has prompted some banks to rethink their strategies.  Coalition explains that “…only a handful of market leaders remain committed to a ‘complete’ service’, while the other banks have refocused their strategies around client, product and regional strengths”.

2014 Full Year Forecast

Despite, the 5% decline seen in the first half of the year, Coalition expects a slight uptick in the second half of 2014, leading to a modest 2% revenue decline to $150.7 bln in overall revenue for the top ten investment banks for the whole year.

Coalition estimates that FICC revenues will post a 9% decline to $67.4 billion in 2014 from $73.9 billion seen in 2013.  Equities trading revenue is projected to slip 2% in 2014 to $40.3 billion.  Investment banking revenue, on the other hand, is expected to rise 13% in 2014.

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