Global investment banks suffered declines of as much as 56 per cent in their trading businesses in the first three months of the year, analysts believe, stoking fears of further lay-offs for staff and lower dividends for shareholders.
Europe’s shrinking investment banks bore the full brunt of the difficult environment for the buying and selling of assets such as bonds, stocks and commodities on behalf of clients. It was highlighted by Credit Suisse’s admission last week that its trading revenue had fallen 40-45 per cent this year.
Not only are many European banks reorganising and trying to sell assets into a falling market but they also have less exposure to the US market, which has fared better than Europe and Asia.
But Wall Street’s biggest banks are suffering too, with analysts predicting first-quarter falls in trading revenue of up to 48 per cent for Goldman Sachs and 56 per cent for Morgan Stanley as slowing Chinese growth, stubbornly low oil prices and fading hopes of a US interest rate rise weigh heavily on client activity and market performance.
The difficult first quarter shows the challenges faced by investment banks as they try to create sustainable profitability now that post-crisis reforms have limited opportunities and raised costs.
Jon Peace, banks analyst at Nomura, said the trading slump would have practical implications for European banks who still need to build capital to satisfy new regulations. “Weaker trading profits will delay the return of normalised cash dividends for the weaker banks and limit the absolute dividend payouts for the stronger banks,” he said.
Huw van Steenis, London-based banks analyst at Morgan Stanley, said it could take more than three years for investment banks to “structurally remove cost and capital” to deal with the new market realities. Banks have already begun pruning. Credit Suisse has announced 2,000 extra job cuts in its markets division after a brutal first quarter and Morgan Stanley said last year it would cull 1,200 jobs in fixed income and back- office functions.
In Europe, seven analysts polled by the Financial Times predicted that the top four investment banks - Credit Suisse, Deutsche Bank, UBS and Barclays - suffered an average collapse of about 25 per cent in trading revenues for the first quarter of the year.
Kinner Lakhani, analyst at Deutsche, said European banks had been hit by a “perfect storm” of concerns about China, energy and global growth. “The cost of exiting non-core positions is also likely to have gone up sustainably as buyers demand a higher liquidity premium,” he said.
On Wall Street, the five leading banks - Goldman, Morgan Stanley, Citigroup and Bank of America - are expected to see trading revenues fall an average of almost 25 per cent when they report first-quarter results next month, according to six analysts polled.
