FX news: Looking for FX clues in the Q4 numbers

JPMorgan Chase was first to market last Friday with its profit figures for 2010. It showed stable FICC income for the fourth quarter but a decline of 14.5% for the whole of 2010. This week, as the other big US banks declared their profits, it became clear that few made more out of FICC in 2010 than they did in 2009. Where reasons are given for the subdued year they generally mention the challenging environment, lower levels of activity and tighter spreads. Despite the forthcoming regulatory necessity to restrict proprietary trading activity this doesn’t look as if it has been a factor contributing to the lower profits: average daily currency value at risk figures, where given, are generally only around 10% lower in 2010 Q4 than in 2009 Q4.

Citibank’s revenue from “Fixed Income Markets” in 2010 Q4 was $1.481 billion, down 58% from $3.501 billion in the previous quarter and down 12% on 2009 Q4’s figure of $1.68 billion. Credit value adjustments (CVA) of around $800 million made a dent in the figures but excluding CVA revenues still declined $1.1 billion between the third and fourth quarters. This was “driven by lower revenues in Rates and Currencies, Securitized Products, Municipals and Credit Products”. There was a further quote in the release that could imply that compression of spreads was a particular factor in the decreased revenues: “The revenue decline primarily reflected lower revenues in market making activity to facilitate client needs.” Over the whole year revenue in “Fixed Income Markets” was down more than a third at $14.075 billion.

Goldman Sachs has changed the layout of its earnings report. Formerly FX revenues were included in “Fixed Income, Currency and Commodities” within “Trading and Principal Investments”. The “Trading and Principal Investments” section is no longer there (presumably in response to the regulatory requirement to amputate proprietary trading activities). Instead there is “Institutional Client Services” and FX now sits there within the sub-category of “Fixed Income, Currency and Commodities Client Execution”. The new numbers have been rejigged – the historical numbers under the new category differ slightly from those under the old one but there is no denying that, at 48% lower, 2010 Q4 revenue compares unfavourably with 2009 Q4, as does whole year 2010, 37% down on 2009. The report says: “During 2010, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment characterized by lower client activity levels, which reflected broad market concerns including European sovereign debt risk and uncertainty over regulatory reform.” It is also possible that revenues suffered from the negative year Goldman had regarding its reputation but the fall-off was almost identical in degree to that at Citi. The Goldman report explicitly mentions the phenomenon of spread compression in that the environment was also characterized by “tighter bid/offer spreads”. It looks as if FX didn’t suffer quite as much as other products however; the decrease in net revenues was attributed to lower results in interest rate and commodity products, commodities and only “to a lesser extent, currencies”.

At BNY Mellon FX actually gets mentioned by name under “Foreign exchange and other trading revenue”. The segment was up on both 2010 Q3 and 2009 Q4 but was off 14.5% on the total year numbers. When further separated out FX still had a good year at BNY: “In the fourth quarter of 2010, foreign exchange revenue totalled $206 million, an increase of 29% sequentially and 2% year-over-year. The sequential increase was driven by increased volumes, new business and higher volatility.”

At State Street “Trading services revenue”, which includes FX and brokerage and other fees, was $310 million for 2010 Q4, an increase of 15% from $270 million on 2009 Q4. Within that FX revenue increased 19% “primarily due to changes in product mix offset slightly by lower volatility and volumes”. The “Trading services revenue” was up 36% on 2010 Q3’s $228 million due to higher volatility and higher volumes in foreign exchange as well as higher fees primarily from transition management in brokerage and other fees. State Street figures for the whole year also showed a small increase in 2010 over 2009.

Wells Fargo is the US’s fourth-largest bank by assets and the second-largest by deposits but it is highly focused on domestic consumer banking. Overall the bank reported record net income but trading revenues are small for a bank of its size and the minor importance of trading at Wells Fargo is also typified by the lack of granularity under the “net gains from trading activities” segment within “Noninterest Income” in the earnings report. Trading activities revenue in 2010 Q4 was up on 2010 Q3 and 2009 Q4 but full-year 2010 was more than 38% down on 2009.

Morgan Stanley actually reported a loss in “Fixed income sales and trading net revenues” for 2010 Q4 but like Citi’s figure this was affected by a debt-related credit adjustment (although confusingly Morgan Stanley refers to this as DVA’ rather than CVA): “Fixed income sales and trading losses were $29 million compared with net revenues of $663 million in last year’s fourth quarter. DVA resulted in negative revenue of $842 million in the current quarter compared with negative revenue of $453 million a year ago.” Even adjusting back for the credit adjustment the quarter was down on both 2010 Q3 and 2009 Q4, a result that the bank said “reflected lower levels of activity”. However, revenue for whole year 2010 was 20% up at $5.9 billion which “primarily reflected solid customer flows in IRCC, which were partly offset by a challenging environment”.

Bank of America Merrill was the last of the US bank to publish its figures and while the FICC figure for 2010Q4 was hardly more than half the revenue for the previous quarter. BofA says that: “spread tightening early in the quarter was offset by diminished client activity and European debt deterioration” although how that is offset rather than complementary is unclear. The quarter’s performance wasn’t all bad as it was in turn almost 50% more than 2009Q4. BofA was unique among the four major players in reporting an increase in FICC revenue for 2010 over 2009 if only just , by 3.4%, with $13.158 billion compared with $12.723 billion.