Climate change or a passing storm? Some investment bankers worry that they are suffering a structural change in their world. Others still believe it is just the cycle. The risk, following strong third-quarter fixed income trading at US investment banks, is that those in the latter camp go easy on cost cutting and chase earnings instead. Citicorp’s fixed income, currencies and commodities revenue was up almost two-thirds year on year; trading at JPMorganand Morgan Stanleywas up one-third. Investors can expect the same as Europe’s investment banks start reporting this week. But it would be wrong to think that things are looking better: trading still relies on highly artificial and temporary stimulus measures.
That is because client activity remains downcast and the bright spot in US trading was driven by QE3. The European Central Bank’s announcement of “outright market transactions” to buy bonds has also perked up debt capital markets activity among the Europeans. Deutsche Bank, for example, reported brisk business in DCM over the summer, and Credit Suisse, HSBCand UBSshould have good third quarters in DCM. Some analysts reckon that DCM revenues at big banks could rise by 50 per cent from the second quarter. Deutsche, Barclays, Credit Suisse and, to a lesser extent, BNP Paribas, should do well in Ficc and, while deleveraging hard, RBStoo. But the outlook for cash equities and equity derivatives at Société Généraleis grim.
Better to watch the likes of HSBC and UBS, which have acknowledged the inconvenient truth that markets have changed. All banks need to cut pay. JPMorgan’s investment banking compensation ratio of 33 per cent makes Credit Suisse’s end-June 50 per cent stick out. Banks that do not cut may have to raise capital as the stimulus wears off. Low book value multiples capture their hesitation.