LONDON: 5 Stock markets may be nudging their highest ever levels, but that’s scant consolation for many of the world’s big investment banks, where revenues from equity trading, an area they have invested in heavily, fell heavily in the second quarter.
Caution ahead of Britain’s European Union referendum, tighter regulation, low trading volumes and a particularly strong second quarter the year before depressed revenue at almost all major investment banks. European names were the hardest hit, with HSBC, the continent’s largest lender, seeing its revenue slide more than 50 percent from the same period last year.
Goldman Sachs saw revenue decline by 12 percent, the worst performer of the top five U.S. banks. JP Morgan was the only one of 11 institutions on either side of the Atlantic whose earnings increased. The drop is a blow to investment banks since equities trading is seen as one of their few potential growth areas given it faces fewer constraints under tough new capital rules than other market businesses such as fixed income.
In March, Reuters reported that Deutsche Bank, a traditional bond trading powerhouse, was hiring about 100 people to boost its equities trading operations, seeking to recover ground in an area seen as vital to its new strategy. Until now, that strategy was making sense with data from research firm Coalition showing that while industry-wide bond trading revenue shrank 36 percent from 2010 to 2015, stock-trading revenue rose 23 percent. But with more banks focusing on this relatively low-margin business, their ability to earn large profits in a crowded market place is dwindling.
“Commission fees are getting squeezed and banks won’t be able to earn as much as they did in the past,” said Neil Wilson, markets analyst at ETX Capital.
Regional factors played a part too, with Barclays’ withdrawal from Asian equities, for example, having an impact on its trading revenue. There was also a huge spike in trading volumes in Hong Kong and Chinese stocks in the first half of 2015 ahead of a sudden slide in the markets later that year and a tail-off in activity. Credit Suisse saw Asia Pacific equity sales and trading revenue drop 39 percent year-on-year.
Reuters’ latest monthly asset allocation poll showed that global investors’ equity holdings were at the lowest in at least five years. Investors have pulled $139 billion from global equity funds so far this year, according to Bank of America Merrill Lynch. “Q2 was very dull, while Q2 last year was very, very good. Volumes were low and banks were very cautious. No one was diving in,” said Chris Wheeler, banking analyst at Atlantic Securities. Wheeler argues all is not lost for banks, with equity trading still a potentially lucrative, less capital intensive business once volumes pick-up. “I don’t think this is a collapse. It’s had a fabulous run through the last few years, but just couldn’t keep that pace up,” he said.
