FICC is back: rates, currencies drive revenues as US banks report Q2 recovery

Mark Baker
Published on:

The fixed-income sales and trading business of the big US banks took a bath in the first quarter of this year, with revenues down by between 10% and 40%. But although not immune from market and geopolitical upheaval, the second quarter could not have looked more different.

Reporting results in late July, the big-five franchises turned in more than $13 billion of revenues from their FICC divisions, up 16% on the first quarter and 22% on the previous year.

JPMorgan reported the biggest year-on-year increase despite starting from almost the largest base, its 35% jump taking revenues to a shade under $4 billion. The bank conceded that this had followed a "weak" second quarter in 2015, when it had been trumped by Citi in fixed income (see chart). JPMorgan was back on top this time around, however, with Citi generating fully half a billion dollars less fixed-income revenue than its rival.

US FICC Q216 chart
JPMorgan's business was more than three times that of Morgan Stanley — which was an outlier in view of its paltry 2% year-on-year gain, from a base that is by far the smallest of the five. Morgan Stanley CEO James Gorman sometimes gives the impression he would prefer people to stop talking about fixed income at all, although the bank's eye-catching move to cut 25% of FICC headcount in December 2015 ensured that wouldn't happen. 

But the latest result is unlikely to cause him to lose much sleep. The bank doesn't break out the profitability of individual product lines, but with headcount slashed by that extent and revenues fractionally up, the figures speak for themselves.

All the banks posted double-digit revenue increases from the first quarter of the year (see table), although Morgan Stanley's outsize 49% jump was a function of a particularly terrible previous quarter, where its revenues fell by more than 50%.

But a few other things were pretty much universal across the five franchises. Credit was broadly up from the first quarter, as was mortgage business, as spread products – including securitized products – benefited from a tightening in US Treasury bonds. Municipal bonds did better for the same reason. Rates franchises were up compared with the previous quarter and the previous year. Commodities was better, helped by oil moving steadily from $38 to $48 a barrel.

Currencies presented a more mixed picture, however – up at some banks but down at others. One determining factor was how active a firm's clients had been in positioning themselves in the first quarter, but differences in the precise client mix at different franchises also probably played a part.

All firms reported that the UK's June 23 referendum on membership of the European Union, resulting in a decision to leave, sparked volatility and volumes in its immediate aftermath.

US FICC Q216 % change table

From that perspective at least, Brexit was a positive for all five franchises, although Gorman provided perhaps the most bittersweet assessment of the opportunities thrown up by the vote, noting that while the outcome was "suboptimal", it did provide the bank with a live stress scenario in which it could demonstrate that its systems were able to run smoothly, allowing clients to access the market. Like others, the firm's FX business was helped by the additional volatility and volumes in the days around the vote itself, but CFO Jonathan Pruzan noted that "one or two days does not make a quarter".

Goldman Sachs sent out a similar message, saying that it had been able to be on the front foot with clients as a result of its careful preparation. More notably, CFO Harvey Schwartz said the firm had seen an uptick in market share during the peak of the Brexit volatility, which might have reflected the competitive environment as other firms restructure businesses.

Paul Donofrio, CFO at Bank of America Merrill Lynch, also identified a competitive opportunity, arguing that the bank had increased its relevance with clients through the episode, by showing that it would "be there when they need us most".

JPMorgan CEO Jamie Dimon's sore throat had led him to take a back seat in his firm's results Q&A session with analysts, until coaxed into speaking by CLSA's Mike Mayo, who wanted to hear from him directly on Brexit. He was typically bullish, pledging his commitment to UK and European clients, adding that if it ended up costing a little more to serve the firm's clients, so be it. "I am not really worried about it."

Word on the Street

The sentiment on the week's conference calls was, for the most part, punchy and confident. JPMorgan was firmly on top, with CFO Marianne Lake focusing on the firm's ability to meet client needs and provide liquidity, even in the wake of the Brexit vote.

JPMorgan had a disappointing quarter in the same period last year, so this year's increase was in part a normalization. Lake said the performance was broad based, with rates, currencies, emerging markets, credit trading and securitized products all doing well; rates was particularly strong, she said. Higher client flows in primary and secondary, driven by a recovery in risk appetite as a result of a more stable environment, helped drive the momentum from March into the second quarter.