US banks see Ficc earnings drop in Q2 2019

The top five US banks saw a combined 13.3% decline in trading revenues for fixed income, currencies and commodities (Ficc) in the second quarter of this year, amid persistent low volatility in foreign exchange, rates and commodities markets.

Morgan Stanley experienced the biggest hit as Ficc trading revenues fell 33.7% quarter-on-quarter this year. Of the five banks, JP Morgan fared the best with only a marginal decrease of 0.9% over the same period.

Ficc revenues at Morgan Stanley stood at $1.1 billion in Q2 2019, compared with $1.7 billion in the previous quarter. On a yearly basis, the bank saw the biggest earnings drop among its peers, with Ficc revenues down 18.4% between the second quarters of 2018 and 2019.

The yearly fall reflects the effects of a decline in interest rates and lower volatility, as well as a subdued level of structured transactions, Morgan Stanley stated in its Q2 earnings report. However, it also noted the net revenues decline was partially offset by increases in credit products on strong client activity.

“The second quarter was met with a mixed market backdrop. The quarter began on a strong footing, but macroeconomic and political uncertainties affected sentiment and conviction,” said James Gorman, chairman and chief executive of Morgan Stanley, on an earnings call.

“Despite [a] sharp decline in interest rate[s] and slowdown in global growth, the business model held up well,” he added.

Goldman Sachs, which saw major drops on both a quarterly and yearly basis of –20.1% and –12.5%, respectively, said the operating environment in Q2 was characterised by generally low levels of volatility and little client activity.

The strong fundamentals that prevailed across markets were nonetheless overshadowed for most of the second quarter by geopolitical uncertainty

David Solomon, Goldman Sachs

The yearly revenue disparity reveals significantly lower net revenues in interest rate products and currencies, as well as lower net revenues in credit products, partially offset by higher net revenues in commodities and mortgages, according to the bank.

“The strong fundamentals that prevailed across markets were nonetheless overshadowed for most of the second quarter by geopolitical uncertainty,” said David Solomon, chairman and chief executive of Goldman Sachs.

“Client activity in April turned quiet amid low volatility, particularly in fixed-income markets. Conditions in May deteriorated as geopolitical events caused significant shifts in risk appetite. Fears of expanding trade wars drove concerns that new tariffs on China and Mexico would erode the prospect for continued growth,” Solomon added.

Despite the mixed environment in the second quarter, it was not all doom and gloom. With increases of 8% and 6.9%, respectively, Citi and JP Morgan are the only two major US banks to have achieved higher Ficc revenues in Q2 2019 than in Q2 2018.

Citi, the only US bank to break down its Ficc revenue, revealed in its second-quarter report that income from rates and currencies fell to $2.1 billion in Q2 2019, down 5.5% from the $2.4 billion earned in Q1, and 11.8% lower than the $2.2 billion gained in Q2 2018.

Volatility in rates and FX were at multi-year lows in Q2 2019. The JP Morgan Global FX Volatility Index dropped to 6.13 – its lowest – on April 19, while the Cboe 10-year Treasury note volatility index (TYVIX) bottomed at 3.42 on April 11.

Meanwhile, the Goldman Sachs commodity volatility index remained flat throughout the quarter, vacillating between 147.59 and 143.67.