Introducing a new series tracking the slow death of the traditional investment banking model (if not banking itself).
Just to round up the recent spate of gawd awful Q1 results from the banking sector:
HSBC first-quarter profit dips 20 percent, says April activity muted – Reuters
SocGen books $731 million writedown on Russia unit – Reuters
Profits halve at Barclays’ investment bank – FT
Goldman Sachs profit falls 11 percent but beats estimates – Reuters
BofA reports first quarterly loss since 2011 on lofty legal bill – Reuters
- JPMorgan Chase & Co, the biggest U.S. bank by assets, reported lower-than-expected earnings on Friday , largely due to a 21 percent decline in bond trading revenue. – (Reuters)
- Citigroup’s Chief Financial Officer John Gerspach said he would not be surprised if bond trading revenue fell 5 to 10 percent for the industry this year. – (Reuters)
That’s just a taste, and yes, varying factors are to blame. However, some clear themes are developing, not least the dismal performance of banks’ FICC departments, especially those fixed income departments still battling with the unexpected consequences of low rates.
We’ve argued before that zero rates over time become effective negative rates, and that this makes the business of banking tricky if not impossible.
The slow, low-rate death comes in many ways, from the loss of interest on margin debt to the collapse of duration more generally, and net interest income. Not only does lending not pay, the only business that begins to works is borrowing for the sake of supporting socially unhealthy practices like cornering or destroying capacity in the system (such as the hoarding of commodities — something that’s no longer deemed acceptable by state or countryman).
But the problems transcend zero rates. There are also the self-cannabilising effects of HFT on arbitrage potential and market making to contend with, not to mention the grueling effects of low volatility on trading models.
There’s also the threat of disruption from niftier intermediaries that can match borrowers and lenders without the need for leviathan-like legacy structures. Not to mention the growing competition from payments systems that circumvent the current banking infrastructure altogether. Last and not least there’s the growing competition from central banks themselves, which due to extraordinary policies are acting more like universal banks that threaten and compete with traditional banking businesses rather than support them.
Of course there will be those who say that FICC troubles are just a blip.
Indeed, as the FT noted this week regarding the bond trading issues:
It was not supposed to be like this. Bond investors sailed into 2014 confident a global bond market sell-off would pick up pace as economic recovery got under way. This year, they said, would be the year the world got back to normal. Instead, the world’s largest bond markets are rallying – and benchmark yields have tumbled to levels not seen since 2013.
“Quite!,” you might say. Bond traders were only caught out because central bank policy didn’t have the effects that were expected. FICC departments were promised rising yields, which arrived fleetingly but then evaporated. Who on earth could have predicted that?”
On that note, a certain panel event we attended about two years ago comes to mind. Tothe talk of central bank exits and the imminent return of higher rates, we suggested that perhaps the biggest risk in the system was everyone’s unquestioning belief that rates and yields would rise eventually, when they might not at all (the only caveat to that scenario being a major China disturbance, but even that would only be a temporary effect). This did not go down well at the time.
It’s a point we later put down in writing. For example, regarding the tightening talk of February last year we wrote:
…we’d argue the Fed is trying to replicate that “new economy” effect and doing so by encouraging a gargantuan mispricing of the curve which everyone can profit from.
A “mispricing” which arrived with gusto later that year…
.. but which had fizzled out by the beginning of this year.
And regarding the unexpected disappearance of “risk off” in January we noted“:
As we’ve already stressed, the fact that this hasn’t happened yet either suggests that the Fed’s latest round of Jedi mindtricks has genuinely changed the fundamentals or (more likely in our opinion) it’s amplified the “risk on” mispricing signal, making it seem more convincing than usual.
Which suggests to us that rising yields in safe assets should now almost always be treated as craftily manufactured mispricings by central banks.
Ficc in the head – FT Alphaville
MARTIN WOLF PROPOSES THE DEATH OF BANKING – Pieria
Barclays moves to cut 7,000 jobs in retreat from investment banking – FT