Given that events during the third quarter centred on Europe, it’s understandable that the European banks have been so vocal in emphasizing the performance of their FX divisions over that period. After all, they do run the biggest euro and Swiss franc currency books in the market. Only this time (as against 2008, when market dislocation reigned) it was a volume game. Previous records were set during the market panic after the collapse of Lehman Brothers in September 2008, when there was a sharp reduction in liquidity.
"Whereas in 2008 revenues were driven by wider bid-offer spreads, in the third quarter [of this year] they were driven by volumes," says Zar Amrolia, Deutsche’s global head of foreign exchange. "Bid-offer spreads have remained quite tight."
Volumes and profitability
Banks do not break out their FX revenues within their fixed-income commodities and currencies departments but both Deutsche Bank and UBS say their FX divisions recorded strong trading volumes and profitability in the third quarter. Barclays Capital, the second-biggest FX bank, ahead of UBS and behind Deutsche, also noted its outperformance of FX compared with other asset classes, attributing it to "strong client volumes" and "group hedging activities". The volatile conditions also meant that clients preferred to trade with the leading liquidity providers.
"It is in market conditions such as these that Deutsche Bank would be expected to front up and provide the market with the liquidity it needs," Amrolia says. While hedge funds and other speculative accounts were active, Amrolia says much of the rise in volumes was driven by corporate hedgers and real-money investors.
UBS also announced its third-quarter earnings. FICC revenues fell by 23% to SFr673 million ($774 million) from SFr869 million year on year, though UBS highlighted FX as one of the bright spots. "A strong performance in the macro business due to high market volatility and good client flows in foreign exchange was more than offset by the impact of illiquid credit markets," the bank disclosed last month.
In an interview with Euromoney in September, George Athanasopoulos and Chris Vogelgesang, global co-heads of FX at UBS, said electronic trading volumes had tripled and yields had increased after new pricing was rolled out on its trading platform, UBS FX Trader Plus, near the end of the second quarter.
Citi, the fourth-ranked FX bank by turnover, also reported better trading volumes. Third-quarter revenues in FICC fell 33% to $2.3 billion year on year. The declines were largely in credit and securitized products but were partly offset by revenue growth in rates, currencies and commodities over the year.
| Mixed fortunes in FICC |
| Quarterly Net Revenue |
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| Source: Credit Suisse, euromoneyfxnews |
"Globally, the FX business performed very well," says Jeff Feig, Citi’s global head of G10 FX trading. "We’re very excited that volumes are tracking significantly ahead of last year and revenues overall have been consistently strong. It was a challenging time for position taking, but franchise revenues were strong and we did particularly well in FX options." JPMorgan, which showed its astuteness in navigating the financial crisis in 2008 within its global markets franchise, produced a strong performance in the third quarter. "During the quarter, there were several events where having the right derivatives position and not being caught off guard was important," says Troy Rohrbaugh, global head of FX at JPMorgan. "We are very keen risk managers. Whether it was increased volatility generally, or specific events in euro or Swiss franc, we avoided the major potholes."
Goldman slips
The same can’t be said for the perennial outperformer, Goldman Sachs. Goldman, ranked ninth in Euromoney’s FX surveyby volume, has long been considered one of the more profitable FX firms, particularly in options. Third-quarter revenues were down by more than a third from the same period a year ago. In the accompanying statement, Goldman said volatile markets created by global economic uncertainty had "contributed to difficult market-making conditions, particularly in credit products, mortgages and currencies".
Market participants suggest the fall might be attributed to its options book, and in particular its position on euro-Swiss franc volatility. Before the Swiss National Bank intervened on September 6, euro-Swiss franc one-month volatility had traded as high as 35%, but then plummeted to 5% in the weeks after the SNB set a floor on the cross rate at 1.20. Goldman Sachs declined to comment. To rub salt into the wound, Morgan Stanley, its main investment bank competitor, seems to be closing the gap. Its FICC earnings during the quarter fell by a modest 4% from the previous quarter and 17% from the same period a year ago.
Bank of America Merrill Lynch’s net revenues in the third quarter fell by 89%. Bruce Thompson, BAML’s chief financial officer, attributed the disappointing trading revenues to "particularly challenging credit market volatility", with revenues in the rates and currency-trading parts of the business down 14% from the previous quarter.
According to industry consultants that track bank revenues across the various asset classes, third-quarter G10 FX revenues overall are expected to be higher, both on a quarter-on-quarter basis and year on year. However, individual bank’s revenues might vary.
