Weak fixed income, currencies and commodities (‘FICC’) revenues hit the world’s top 10 investment banking giants with their top line witnessing a 5% decline in the first half of 2014, according to a report released on Wednesday by Coalition, a U.K. analytics firm. Total revenue came in at $82.3 billion compared with $86.8 billion in the year-ago comparable period.
The Coalition Index relates to the performance of the 10 biggest global investment banks – The Goldman Sachs Group, Inc. (GS - Analyst Report) , JPMorgan Chase & Co. (JPM - Analyst Report) , Morgan Stanley (MS - Analyst Report) , Deutsche Bank AG (DB - Analyst Report) , Citigroup Inc. (C - Analyst Report) , Bank of America Corporation (BAC - Analyst Report) , Barclays PLC (BCS - Analyst Report) , Credit Suisse Group AG (CS - Snapshot Report) , UBS AG (UBS - Analyst Report) and BNP Paribas SA (BNPQY - Snapshot Report) .
The Figures So Far
FICC, which has become the major revenue source for banks amid the low interest-rate environment, fell 13% year over year to $39.6 billion in the first half of 2014. Further, forex revenues exhibited a declined of 35% year over year, marking the biggest year-over-year decline for a half year period since 2008.
Revenues from equity-trading business of the banks decreased 4% year over year to $21.6 billion, hurt by decline in derivatives.
Factors That Affected Investment Banks
The dismal performance of FICC was a result of several challenges that the banks are facing – including stricter regulations for maintaining higher capital against risky assets. Also, the absence of volatility in financial markets contributed to the shrinking revenues.
Higher costs have also added to the woes. Coalition mentioned that compliance costs in FICC divisions have increased while expenses in the technology platform escalating with new reporting standards and gradual dominance of automated trading in the market.
In order to address the margin compression and declining revenues, expense management has become a priority for the banks. One area of cost cutting has been through lay-offs and pay cuts. As per Coalition data, these banks reduced front office jobs by 4% while the FICC division witnessed 9% job cuts.
According to the analytics firm, “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”.
The Brighter Side
Though revenues of these banking giants dipped, higher revenues from commodity trading and strong mergers and acquisitions (M&A) activity have supported the overall performance of the banks.
Trading in U.S. power and gas benefited from the prolonged cold winter in the country leading to a rise in raw-material revenues. Also, the market witnessed renewed interests among investors regarding commodities. So this section came out as the only within FICC to show an improvement. Commodities revenues climbed up 21% year over year.
With the gradual recovery of the global markets, a rebound in M&A activity and a surge in IPOs have resulted in a 21% year-over-year increase in revenues in the investment banking divisions of the banks in first-half 2014. Notably, M&A volumes hit seven-year high at June-end and capital market activities advanced 16%.
What’s Expected Down the Road?
In its report, Coalition provided downbeat estimates for 2014. Annual revenues for the major investment banks are expected to decline 2% year over year to $150.7 billion.
FICC revenues are expected to witness a 9% decline to $67.4 billion in 2014 from $73.9 billion in 2013. Further, revenues from equities trading is estimated to come in at $40.3 billion, reflecting a 2% decline. However, investment banking, which includes revenue advisory and underwriting businesses, is expected to exhibit a rise of 13% in 2014.