Bank forex trading revenues fall by a third

Investment banks’ earnings from foreign exchange trading fell at their fastest rate since the global financial crisis in the first half of 2014, hit even harder than other trading areas by low volatility and volumes.

Revenues of the 10 largest investment banks across the US and Europe fell 5 per cent year on year in the six months to June, largely as a result of the 13 per cent drop in trading of bonds and other fixed income products, according to data published by Coalition.

The slide in trading of major currencies was even more striking, with revenues down 35 per cent from the first half of 2013 – the biggest year-on-year decline since 2008.

This is largely the result of ultra-loose monetary policies that have kept currencies trading in tight ranges. But the fall has been exacerbated by investigations into manipulation of the foreign exchange market, which have prompted many banks to suspend senior traders and accelerate a shift from voice to electronic trading.

The drop was also accentuated by comparison with a period when the launch of so-called Abenomics in Japan allowed traders to make hefty profits from the yen’s rapid devaluation.

The prolonged underperformance of fixed income divisions – whose earnings have been falling since 2012 – meant they have continued to bear the brunt of job cuts. Investment banks cut front office jobs by 4 per cent overall in the first half, Coalition’s figures showed, with fixed income headcount down 9 per cent.

“Only a handful of market leaders remain committed to a ‘complete’ service, while the other banks have refocused their strategies around client, product and regional strengths,” Coalition said.

Job cuts and lower bonuses allowed investment banks to limit the squeeze on their margins. However, Coalition noted that compliance costs had risen in fixed income divisions, while new reporting requirements and the shift towards automated trading had added to the costs of technology.

However, banks’ overall performance has been boosted by a recovery in mergers and acquisitions activity that reflects rising confidence in the global economy. The revenues of investment banking divisions jumped 21 per cent year on year, largely due to a bounce in M&A in the Americas and a surge in initial public offerings.

The report also suggests that the worst of the decline in fixed income is now over, with Coalition forecasting a smaller decline of 9 per cent over 2014 as a whole.