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Present ImperFICC

8 October 2014 By Antony Currie

Wall Street’s fixed income trading desks welcomed a rare return of volatility. It probably hasn’t been enough, though, to ensure decent profitability for Goldman Sachs, JPMorgan and Morgan Stanley in the quarter just ended. They’d need to generate up to $12 billion of extra revenue among them trading bonds, foreign exchange and commodities to achieve a return on equity of 15 percent.

The FICC teams cannot do it alone. Revenue is usually lower in the second half of the year. The recent pickup, from shifting central bank activity to Bill Gross’s shock departure from Pimco at the tail end of the quarter, will make only so much difference.

Goldman, for one, would have to rake in an additional $4 billion of annualized bond trading revenue to increase a 10.9 percent return on equity in the first six months of this year to the more respectable 15 percent level. That’s calculated by folding back in taxes paid at a 30 percent rate and applying the 25.8 percent pre-tax margin generated by Goldman’s combined FICC and equities trading, which the bank doesn’t report in isolation.

On that same basis, Morgan Stanley would need to produce an extra $6 billion of annualized FICC revenue to bring up to snuff its 8.4 percent return, after stripping out a tax gain. That’s six times what its traders turned out in the second quarter. Counterparts at Barclays would be on the hook for about $3 billion to boost its 5.7 percent return on equity. JPMorgan, whose investment bank posted a 13 percent return in the first half, would have to find another $1.8 billion, and Deutsche Bank, at 14 percent, just $450 million.

The figures call into question the idea that the business is merely in a cyclical slump. More aggressive cost-cutting might therefore be necessary. It perhaps explains how Bank of America beat rivals in the first half with a 37 percent pre-tax margin and a 14.3 percent return on equity from its FICC and equities traders.

BofA’s and Deutsche’s broader businesses, though, are nevertheless stuck with mid-single-digit returns. Across the industry, investment bankers, brokers, wealth managers and lending professionals will have to step up even more. The traders may have carried them nearly as far as they can.


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