this is a businessfinancenews.com article.
Fixed Income Currency and Commodity (FICC) trading division at various US banks’ is struggling after reporting years of declining revenue.
Bank of America Corp (NYSE:BAC) along with other big banks is on the verge of cutting down its operations in the Fixed Income Currency and Commodity (FICC) division, as the segment on the Wall Street has been a horror show, since the start of 2015. An amalgamation of tougher regulations, low volatility, and low-interest rates has coincided with a decrease of FICC revenue, on the back of cost-cutting measures being taken and implemented at various banks.
In the announcement of the financial and operating results for the third-quarter of fiscal 2015 (3QFY15), Bank of America, Morgan Stanley (NYSE:MS), and Goldman Sachs Group Inc. (NYSE:GS) were few of the financial institutions, which reported a slump in their FICC earnings and revenues.
Bank of America’s investments in sales and trading activity contributed about 10.9% of the total revenue in 3Q. Revenue in the segment came in at $2,285 million, against $2,381 million reported in the corresponding period last year, representing a 4%decline. . The decrease is ascribed to its credit-related products.
Morgan Stanley witnessed a reduction of 42% year-over-year (YoY) in its bond’s trading revenue. Goldman Sachs posted net revenues of $1.46 billionand represented a decline of 33% in 3QFY14. US interest rates and macroeconomic conditions in China have raised ambiguities and fear, which has provoked a decline in the trading activity.
Furthermore, new capital rules are penalizing banks for maintaining large quantities of debt securities in their portfolio. Post 2008 financial crisis, financial institutions are being shifted away from their traditional roles in the bond market. The banks used to hold securities in their balance sheet and provide additional liquidity in the market. This activity boosted bond investment significantly.
Interestingly, Deutsche Bank seems to be making the most from American Banks. European banks have been doing better than their US rivals, in terms of currencies, interest bearing products, and bond trading. However, higher capital rates still make European Banks less profitable. The growth at Deutsche Bank is driven due to bond trading in emerging markets, large-scale corporate bond trading, and decent activity in interest rates. Despite, being a winner in Europe’s fixed income markets, the entity still lags behind in terms of Return on Equity (ROE).
Business Finance News believes that the economic environment for financial institutions will remain to be challenged owing to the prolonged weak-trading results in FICC trading divisions. Despite declining returns in the segment, we believe that this should not be a major concern for banks, as most of them are maintaining solid liquidity levels and capital.
FICC trading division at various US banks is struggling after reporting years of insufficient returns and declining revenue. It is still essential for banks to have investments in the segment, with the aim to diversify their portfolios.
The non-farm pay roll data for October suggests that the unemployment rate has declined to 5% from 5.1%, and as the aforementioned graph shows that 271,000 new jobs are added to the domestic economy against the economists’ expectation of 185,000. The statistics show that the economy is in the improving trajectory.
Capital markets are also expected to grow substantially, as significant investments are likely to take place in the equity market, and investors in order to reap a higher return will turn to shares market.
In August, global markets became very volatile due to deteriorating Chinese economy. The bond trading segment typically increases as risk-seeking traders seek more gains. But with immense uncertainty, banks witnessed a reduction in their revenues. Now that is signaling for a hike and improvement in the economy and is believed to demonstrate healthy markets. Trading volume in stocks is expected to increase.
In Deutsche Bank’s recent report, analyst Matt O’Connor has stated that FICC continues to be weaker than expected in 3Q. Clients seem to be waiting for December, when the Federal Reserve is expected to announce its decision regarding interest rates.
Within the credit segment, spreads have been narrowed, but issuance and the inventory level held by investment banks have remained low. Owing to flat inventory held by banks, mortgage also remains to be weak. He further notes that in the equity market, cash volumes have continued to be lower andhedge funds with their de-risking measures shall resist financing revenues.Regardless of concerns in the FICC division, Bank of America has ROE of 6.5%, which surpasses 4.71% reported by Morgan Stanley.Equity research analysts covering Bank of America stock are positive on its long-term prospects.27 out of 38 analysts have recommended the stock a Buy, nine have suggested selling the Stock, whereas, two have proposed a Hold rating.
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