Bank FX revenues set to drop further in 2013

By:
Peter Garnham
Published on:

FX revenues at leading investment banks are set to drop further in 2013 as trading volumes continue to suffer, according to consultancy firm Coalition.

G10 bank FX revenues, which fell 22% in 2012, were forecast to drop by an additional 7% to $7 billion for the full-year 2013.

The decline comes as G10 FX markets have struggled for direction amid political and economic uncertainty in the US and the low interest environment globally, which has weighed on exchange-rate volatility.

Coalition says the third quarter of 2013 was characterized by substantially lower volumes and weakness in G10 FX forwards – activity levels which have been badly hit by the lack of interest-rate volatility.

“Several banks were also affected by poor performance in FX options,” says the consultancy.

 FICC revenues by product
 
 Source: Coalition

The slowdown in G10 FX trading activity has been reflected on the world’s leading currency trading venues.

Indeed, all three of the largest over-the-counter spot FX trading venues saw declines in their daily volumes in October.

Average daily volumes on Thomson Reuters’ main dealing and matching platforms fell $13 billion, or 11.8%, to $97 billion a day, while volumes on FXall fell $5billion, or 4.5%, to $106 billion a day.

Furthermore, average daily volumes on EBS, Icap’s electronic FX broking platform, dropped $4 billion, or 5.2%, to $77 billion. That is a record low since Icap acquired EBS in 2006 and down 16.8% year on year.

Icap says while changes to Japanese monetary policy drove yen activity on EBS during the first quarter, overall volumes have been subdued.

The firm says that is due to a number of cyclical factors, including “a historically narrow trading range” in EURUSD, EBS’s most popular currency pair, and the low interest-rate environment depressing carry trade activity.

Meanwhile, in emerging markets (EM), Coalition says revenues in the first half of 2013 were comparable with the first half of 2012, with Asia outperforming Central and Eastern Europe, Middle East and Africa, and Latin America.

“However, in the third quarter of 2013, Asian FX and rates markets slowed as a weak economic outlook and turbulent markets dampened client demand,” the consultancy says.

Coalition forecast bank EM will drop by 6% to $14.4 billion in 2013.

Coalition estimates, with the exception of G10 credit, bank revenues across FICC will decline in 2013, falling 20% to $73.6 billion.

The weakness, it says, has been caused by the lack of a long-term refinancing operation (LTRO) from the European Central Bank, anticipation of rising interest rates and a decrease in institutional client activity.

Hardest hit is G10 rates, where Coalition forecast revenues will decline by 42% compared with a strong 2012, when LTRO-related cheap financing supported activity.

In contrast, Coalition says G10 credit will be the only FICC sector set to see rising revenues in 2013, up 16% to 19.6 billion. However, the consultancy warns a strong first-half performance in 2013 by high-yield and distressed businesses started to wane during the third quarter.



 Bank revenues by business
 
Source: Coalition 

Overall, Coalition expects weak returns in FICC will mean the performance of the world’s top-10 global investment banks will remain subdued in 2013.

That is despite a stronger performance from banks’ investment banking divisions (IBD) and forecasts for the best results from banks’ equities businesses since 2010.

IBD revenues are expected to rise by 10% to $37.2 billion in 2013, and equities revenues to climb by 10% to $37.2 billion.

Total revenues, however, are expected to drop by 5% to $151.7 billion thanks to the underperformance in FICC.

Coalition tracks the performance of the 10 largest investment banks globally. They are Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, RBS and UBS.