The reporting season for Europe’s investment banks starts this week and expectations are not high…
From Monday’s FT:
European investment banks are expected to reveal sliding revenues from one of their core businesses when Deutsche Bank kicks off the earnings season this week, mirroring the results of their Wall Street rivals. Revenues from banks’ fixed-income, currencies and commodities trading, or FICC, operations will be down as much as 35 to 40 per cent year-on-year at institutions such as Barclays and Credit Suisse, analysts estimate.
And here in three quick charts (click to enlarge) is why.
So that’s the Vix (equity volatility), BBOX (interest rate vol) and CVIX (FX vol) all flat-lining.
But it isn’t just the investment banks that will be suffering from the lull in volatility. The big inter-dealer brokers like Icap and Tullet Prebon will also be feeling the pinch.
Mark Williamson of broking house Peel Hunt estimates that 50 per cent of Tullet’s revenues come from fixed income, and he makes the following observations:
The extent to which Investment Banks FICC revenues are under pressure implies that it will almost certainly impact on the IDB’s. The first evidence of this is likely to emerge on Wednesday when ICAP publishes its IMS while prelim results are due from Tullett on 8th March.
Moreover recent results from the Investment Banks suggest a challenging environment with UBS having reported subdued FICC (fixed income, currency and commodities) market conditions and tighter spreads while Goldman’s suggested that the environment was characterised by lower client activity levels. Morgan Stanley also suggested that its results had been impacted by lower activity levels
And at pixel time, Icap was the biggest faller in the FTSE 100, down 15.5p at 540p as investors look to lock in profits ahead of the update:
Williamson reckons investors should be looking to do the same in Tullett, which has also had a reasonable run:
We have always maintained that business such as Tullett should not trade on high earnings multiples with revenues inherently geared to volatility levels and being unpredictable as a consequence. Volatility has dropped off and this caused us to downgrade our estimates for 2010 by 7% following the Q3 IMS. Since then conditions appear to have remained subdued and consequently the balance of risks to our 2011 forecasts would appear weighted to the downside. The stock is trading 9x earnings based our current 2011 estimates and in line with our 410p price objective. This appears roughly appropriate, although downgrades would inevitably knock the share price. Consequently we are downgrading our stance from Buy to Hold and would recommend that active investors consider locking in some profits on a trading view.
Related link:
Goldman looks back at ‘dead’ days – FT