Revenues for fixed income, currencies, and commodities (FICC) is now at the lowest point since the financial crisis, with the top 10 investment banks losing 15% year-on-year to just $80 billion in 2013 compared to $144 billion in 2009, and it could continue to fall by 13% – 18% this year due to a combination of lower levels of trade activity and tightening spreads that are returning to historical norms now that markets are finally stabilizing.
“Broker revenue generation is largely a function of income from client activity and gains and losses on inventory management. That said, the relative importance of activity and inventory management varies significantly by business line,” write Credit Suisse analysts Christian Bolu and Moshe Orenbuch in a March 28 report. “Our methodology builds up FICC revenues by underlying business and as a result captures the activity vs. inventory management nuances by business.”
G10 rate revenues down 65%, commodities revenues down 64%
The main drivers of the decline in FICC revenues have been G10 rates, G10 credit, and commodities. G10 rates (including government bonds, swaps, short term interest rates and money markets, repo agreements and munis) have declined 65% since 2009 because of a normalization in the bid-ask spread. Daily volumes and dealer balance sheet positions both continue to decline this quarter, and Bolu and Orenbuch estimate that revenues could fall 35% or more over 1Q13.
Commodities are down nearly as much, losing 64% of revenues since 2009, because of lower commodity price volatility and reduced dealer appetite stemming from regulatory uncertainty. They look set to rebound as much as 5% this quarter as asset prices are finally finding support and volatility is again on the rise.
G10 credit (investment grade, high yield and distressed debt, exotic and structured bonds, loans) revenues, which are correlated to balance sheet and asset prices, have fallen 38% since 2009. “We believe the decline in revenues here have been driven by less in the way of credit spread tightening which benefited revenues in 2009,” write Bolu and Orenbuch, though they have stabilized since with the exception of 2011 due to the Eurozone sovereign debt crisis.
JPMorgan, Citi lead FICC market share
While the FICC industry has had falling revenues over the last few years, US investment banks have been taking a larger piece of the pie. JPMorgan Chase & Co. (NYSE:JPM) and Citi have the strongest positions with 19% and 16% market share respectively, partially due to consolidating the acquisitions of Lehman Brothers and Merrill Lynch. Euroepan banks have been at a competitive disadvantage both because of weaker macro conditions, and because they have been focused on capital restructuring and adapting to new regulations in recent years.