Banks are facing a slump of 15 percent in market trading revenue in the first quarter, spoiling what is normally the most lucrative period when investors put their money to work at the start of the year.
Investment banks are suffering after a steep decline in oil prices and worries about China’s economy triggered a wave of volatility that swept through financial markets in the first six weeks of the year.
Banks’ fixed income, currencies and commodities (FICC) trading operations are expected to have been hit hard, with revenue at nine of the largest institutions falling to $19.2 billion from $22.6 billion in the same period last year, according to data analytics firm Tricumen.
That would mark the worst first quarter in the four years that Tricumen has been compiling comparable records and a significant decline of more than a third from the $30 billion at the start of 2012.
The downturn comes as banks are having to comply with new regulations forcing them to hold more capital, reduce risk-taking and scale back market-making activities, all of which are squeezing liquidity from an array of capital markets.
“Q1 is normally our strongest quarter and it hasn’t been very strong,” John Cryan, CEO of Deutsche Bank told a financial conference in London on Wednesday.
“February was pretty tough,” he added, noting an end of quarter rush would not make up for a slow start. Cryan also reiterated that the German bank was unlikely to make a profit this year.
The first quarter of the year often accounts for more than 30 percent of annual income for investment banks.
Traders sometimes welcome what they deem to be “good” volatility which allows them to profit from pricing anomalies. But volatility characterized by thin liquidity, widening bid-offer spreads and sharp market falls is considered less healthy.
This is what happened in the early part of this year, when credit spreads widened dramatically and many major equity markets recorded their worst start to a year in decades.
This “bad” volatility, decline in revenue and increased compliance with new regulation is forcing banks to cut costs even further, resulting in tens of thousands of job losses across the industry.
“There are more and more signs of fragmentation and liquidity is drying up. Banks are still deleveraging and are required to hold greater capital against their balance sheets … it’s difficult for our customers to make money,” said the head of FICC trading at a top-tier bank.
“Macro hedge funds are really struggling, and when our customers don’t make money, we struggle,” he added.