Investment banks have had a horror show in one of their biggest business lines.
Credit-trading desks, which sit inside fixed-income units, have had a terrible run this year. Revenues are down, bonus pools have been wiped out, and traders are trying to move on.
Revenues for the business line at the top-10 banks are forecast to be down as much as 35% in 2015, according to Paul Johny, a director of research and analytics at Coalition.
That would represent a drop of close to $9 billion. Credit trading – which encompasses bonds, distressed debt and credit default swaps – generated $25 billion in 2014, according to Coalition.
The situation deteriorated in the third quarter as credit spreads widened as investors began to worry about risks to global economies. UBS said in a note Wednesday that there were ‘clear signs of contagion in credit markets,’ as reduced liquidity and the elevated level of stress in commodity-related companies led to selling pressure.
Higher spreads mean bonds prices are falling, making for difficult trading conditions and potential mark-to-market losses on bank-trading books.
The weakness in the business is likely to cast a pall over the third-quarter earnings season, which JPMorgan will kick off October 13. Banks don’t typically break out the performance of their credit divisions within the fixed-income revenue line, but often mention it on earnings calls and presentations.
‘From a very big-picture perspective, the single-biggest factor in predicting the direction of FICC revenues is what is happening to credit spreads,’ Guy Moszkowski, managing partner at Autonomous Research US, told Business Insider.
This post was published at David Stockmans Contra Corner on October 2, 2015.
Recent Comments