The Fixed Income Revenue Slump - Areas affected?
Monkeys,
we've all been hearing for some time now about ft.com/intl/cms/s/0/d1197cf6-8415-11e3-b72e-00144feab7de.html#axzz2yu73E5so">the great rotation away from most bonds, receding FICC revenues at investment banks, and most recently about JPM's and Citi's 14Q1 earnings, with FICC revenues decreasing 21% and 18% respectively.
My question to you is: What areas within FICC (and especially the FIC(urrencies) part) do you think are/are going to be most/least affected? In terms of rates/FX/credit(IG vs HY)/mortgages/other desks in flow/structured/structuring, regions, specific banks etc. I can understand also from above articles that esp. govies revenue might take a hit with regained investor confidence post-crisis. But what else are the trends you are seeing?
Cheers for sharing your thoughts. Or maybe some hard data?
Anything that's balance sheet-intensive, i.e. bond trading, will be affected. The institutions that are the most affected are the ones for whom regulatory capital requirements are particularly stringent, e.g. the Swiss banks. That's sort of the summary.
How can you tell if something is balance sheet intensive?
Thanks. I know that market making in bonds should be balance sheet intensive as traders hold an inventory over days/weeks. But you're saying, for example, that FX revenues will not go down as much because traders regularly have smaller inventory over time and therefore less capital demand? Would that mean that the FI revenue decrease is mostly supply and not demand led, by which I mean that investment banks themselves are scaling down due to regulatory/capital pressure and not because clients trade less with banks/alternative measures such as exchanges for swaps are formed?
Who would you then say is the relative winner in this? Where does the client activity go when the banks are scaling down? To other banks (such as BAML registering only 2% revenue drop vs. JPM/Citi's ~20% drop in 14Q1) or will we really see the spawn of bond exchanges?
FICC revenues are down at BAML, you must've misread. "Revenue in the fixed-income, currency and commodities sales and trading division decreased 15 percent to about $2.95 billion"- WSJ
FI revenue drop is, in fact, a response by the banks themselves to increased regulatory pressure and not a result of less end user interest.
Basically, it's a bit of a complicated story, as there's a variety of factors impacting these things. However, it's likely that the usual suspects will be winners in this. Specifically, JP, Goldies and BoAML seem well positioned.
On the flip side Securitized Products will probably do extremely well due to the fact that it helps relieve balance sheets.
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