Fitch: Volatility to Soften US GTUBs' 1Q16 FICC Results

NEW YORK--(BUSINESS WIRE)-- The first quarter is typically strong for the capital markets businesses of US global trading and universal banks (GTUBs), but widespread market volatility so far this year could keep clients on the sidelines, which would place further pressure on already-challenged fixed income, currencies & commodities (FICC) revenues, according to Fitch Ratings.

Bond trading, which is among the largest components of FICC, fell in January, when it is usually at its heartiest level for the year. Average daily bond trading volume in January 2016 was 2.7% lower than January of 2015, according to the Securities Industry and Financial Markets Association (SIFMA).

The first quarter of 2015 amounted to 35% of the total FICC revenue generated for the year. Given the importance of the first quarter, continuing weakness in FICC revenues that began in the second half of 2015 could meaningfully hamper overall bank earnings for 2016. This could also lead banks to pursue additional cost savings, including further staffing optimization.

Over the past few years, the contribution of FICC revenues for the five US GTUBs (JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley) has been declining. For example, FICC accounted for 49% of total 1Q15 revenue for the five banks but dropped by over 10 percentage points by 4Q15, registering at 38%. Debate about if this reflects a structural or cyclical trend continues, but with another fairly weak quarter in 4Q15, the structural argument for lower fixed-income trading is becoming more compelling.

A large part of this structural decline is due to tighter regulatory requirements that require more capital be held against certain inventory and trading positions. In addition, the Volcker rule also tightened requirements for proprietary trading activity and reporting. These regulatory requirements appear to be incentivizing banks to reduce overall FICC inventory positions and favor more highly liquid securities, which typically carry lower spreads and thus are less profitable.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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