Covid induced volatility and trading levels fuelled record breaking revenues for the world’s largest investment banks last year but the surge is unlikely to be replicated in 2021 unless markets experience spikes of volatility similar to 2020’s, according to S&P Ratings research.
The analysts noted that fixed income, currencies and commodities, or FICC, trading revenue, which was the main driver of overall revenue growth at these behemoths has already started to normalise from the all time growth levels booked in the first half of 2020.
All 13 banks tracked by S&P Global Market Intelligence, registered double-digit declines in third quarter FICC revenue from the second quarter, with 10 booking decreases of more than 30%.
The data shows that Goldman Sachs Group reported the biggest quarter-over-quarter FICC drop, at 40.92%. Overall, there were quarter-over-quarter falls in total revenue at 10 of the 13 banks, with UBS, Société Générale and Natixis being the exceptions.
The fourth quarter was mixed, with October activity roughly replicating third-quarter levels, before picking up in November thanks to the US election and positive Covid vaccine news. However, levels fell again in early December.
The S&P analysts cite Michael Turner, head of CIB analytics at Coalition who attributed this to many “buyside clients locking in their returns for the year” and looking to ride out the market by 2020-end.
Given ongoing uncertainty due to geopolitics and the pandemic’s trajectory, Turner said 2021 will not be smooth sailing although Coalition’s base case scenario is for a “modest continual improvement” in the economy with interest rates remaining low and a smooth vaccine rollout.
For investment bank revenue, trading dynamics across products are expected to change from 2020 as economies recover and market volatility eases. However, while 2021 revenue will fall year over year, he expects that overall, it will be above 2019 levels.
Macro-heavy banks, some of which booked FICC revenue growth of 50% to 70% in the first nine months last year, boosted by bouts of volatility in flow rates and foreign exchange, will probably experience a sharper revenue decline year over year, falling faster in second half of 2021, said Turner. Revenue at credit-heavy banks is likely to be more resilient as credit revenue improves in the second half of this year.