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Investment banking trading revenues set to shake off slump in Q1

[LONDON] The return of volatility in global financial markets is expected to provide a boost to investment banking trading revenues in the first quarter after years in the doldrums.

The first quarter is typically the strongest period of the year for investment bank income, and revenues for the top firms in the three months is likely to be up 7 per cent from a year ago, analysts at JPMorgan said this week.

Fixed income, currencies and commodities (FICC) businesses, which account for about half investment banks' revenues, could see a 9 per cent increase year-on-year, with currencies the best performer, after slumping in recent years on the back of tougher regulations and low market volatility.

Banks have been reshaping themselves to increase profitability by cutting staff and business lines as regulations brought in after the financial crisis restrict the amount of capital banks can put to work, and a decline in volatility has led to fewer trading opportunities.

Since 2009 revenues in FICC have declined by about 50 per cent at the top 10 investment banks globally, data from industry analytics firm Coalition shows.

Shock moves by the Swiss National Bank (SNB) in January to remove its cap on the Swiss franc, the launch of the European Central Bank's (ECB) trillion-euro quantitative easing (QE) programme and moves by the Federal Reserve to tighten monetary policy have created price fluctuations that traders thrive off.

FX volatility is up 30 per cent in G7 currencies and volumes with it, and higher rates volatility is leading to higher trading volumes and margins, according to JPMorgan analysts.

JPMorgan and Wells Fargo will kick off first-quarter earnings seasons for the banks on April 14.

Analysts at Deutsche Bank also forecast trading income streams to rise year-on-year, strongly beating market expectations, especially for European Banks. Their top picks include UBS, Credit Suisse, Barclays and Societe Generale in Europe.

JPMorgan's investment banking chief, Daniel Pinto, said in February the first few weeks of the trading year had been "very strong" and trading revenues for the first quarter had been on course for a rise from a year earlier.

Citi's CFO John Gerspach said in March that if not for the hit the company took when the Swiss franc was allowed to rise in January, a revenue increase in the interest rates and currencies business would have been "strong".

Goldman Sachs analysts lowered their estimates for the big Wall Street banks - JPMorgan, Citi, Morgan Stanley and Bank of America Merrill Lynch - by about 6 per cent for the first quarter, saying a fall in FICC revenues would more than offset a rise in advisory income.

US investment bank Jefferies has already said its FICC revenues in the three months to the end of February were down 56 per cent from a year before and the market was "tepid".

REUTERS