29 Jul 2020 20:18 IST

Europe’s FICCle bank traders flatter to deceive

As the trading boom subsides Europe’s biggest banks are staring at a difficult second half of the year

For once, Europe’s bank traders aren’t the dunces in the class. Having long dragged down group-wide returns, the markets-based units of Barclays and Deutsche Bank surged in the second quarter. Yet ebbing volatility implies that the old reality will return before long, necessitating further cuts.

Both £19 billion Barclays and €16 billion Deutsche reported on Wednesday. Revenue skyrocketed in their fixed-income, currency and commodities sales and trading, or FICC (fixed income, currencies, and commodities) divisions. Barclays Chief Executive Jes Staley unveiled a 60 per cent year-on-year surge to £1.5 billion, while Deutsche’s equivalent business rose by 39 per cent. That helped their investment banking units generate respective returns on tangible equity of 9.6 per cent and 11.5 per cent — better than the group-wide results. It bodes well for BNP Paribas, HSBC, and other European banks with big trading operations yet to report.

Strong competition

The first glitch is that Barclays and Deutsche’s trading gains were smaller than their US rivals. American investment banks on average doubled their FICC revenues compared with a year earlier, according to Goldman Sachs data.

Second, FICC has probably had its time in the sun. The average gap between bid and ask prices on one and two-year US. Treasuries dipped below five basis points in recent weeks, Citi analysts reckon, compared with around 15 basis points at the start of April. That gives traders less room to make money by matching buyers and sellers. Meanwhile the ICE BofAML MOVE Index, which tracks expected treasury market volatility, is down 30 per cent in the past three months, Refinitiv data shows.

Slowing volatility

As the trading boom subsides, the Europeans’ perennial problems will re-emerge, such as high costs and limited scale. Barclays and Deutsche’s FICC revenue, combined, was about 40 per cent less than JPMorgan’s alone in the second quarter. The cost-income ratio of their wider investment-banking divisions, meanwhile, was about 10 percentage points higher. The Americans’ higher market share begets greater economies of scale, pricing power and technology investment budgets, cementing their dominance.

Investors, for their part, are treating the trading gains as a blip. Of Europe’s top 30 banks by market value, those with an investment banking business on average trade at a 23 per cent discount to the wider sector, according to Refinitiv data. Closing that discount requires massive cost cuts and investment in technology. Traders’ second quarter win looks FICCle.