Foreign exchange divisions at investment banks are seeing a decline in profits this year as the asset class loses its status as a star performer, underlining dwindling interest from global investors in the world’s largest financial market.
Revenues this year from investment banks’ foreign exchange divisions are down 23 per cent, falling from $7.4bn in the first three quarters of 2011 to $5.7bn in the same period this year, show figures from Coalition, an independent investment banking and financial services analyst.
The drop in revenues is a blow to the investment banking sector given that currency trading has traditionally been one of the most profitable client-related areas of fixed income.
Currency trading makes up about 15 to 20 per cent of revenues in fixed income currencies and commodities (FICC) and its average 30 per cent return on equity before the crisis was only beaten by proprietary trading, according to McKinsey, the consultancy group.
The asset class weathered the storm better than other areas after the financial crash of 2008, when many forex divisions recorded their best ever year as investors tried to offset losses incurred elsewhere in the more liquid currency market.
“From 2008 to 2010 the fx name was up in lights,” says Kevin Rodgers, head of fx at Deutsche Bank, the largest bank in foreign exchange. “We’re back to being a solid contributor but relatively speaking it’s not the starring role it was.”
Forex divisions at investment banks have been forced to become much more competitive on price this year to entice investors into a market that has become difficult to trade, with volatility at a five-year low.
Investors have been staying away from foreign exchange as intervention from central banks has damaged key strategies for making money in currencies, making it harder to find trends to follow and reducing interest rate differentials. Companies are also hedging their foreign exchange exposure less as volatility has fallen. That has helped to reduce profits.
HSBC, one of the few banks to break out forex figures, reported a 20 per cent drop in forex revenues in the third quarter this year from the same period in 2011.
Barclays said lower contributions from foreign exchange had offset an 11 per cent rise in its FICC division over the same time period.
Forex revenues at Deutsche Bank fell, according to bank insiders, even as volumes hit record highs in the third quarter.
Citigroup was one of the few banks to buck the trend and record rising revenues in its forex unit, according to bank insiders.
But most of the gains came from emerging market rates, which are included in the bank’s forex division.
Get alerts on Financials when a new story is published