If you're a fixed income trader and you've seen the third quarter results from J.P. Morgan, the third quarter results from Citi and the third quarter results from Bank of America, you will be asking one question: "Will I get paid?"
With good reason.
Fixed income traders haven't just had a good third quarter. They've had a truly great third quarter. At J.P. Morgan, Q3 fixed income trading revenues were the best they've been since the first quarter of 2013. Moreover, the comeback was broad-based: KBW analysts point out that J.P. Morgan's macro trading revenues (rates and FX) were up 30% year-on-year, while its spread products (credit and securitization) revenues were up 40%.
Fixed income traders are hot all over. Again.
It's not just JPM. Bank of America today provided succour to everyone trying to believe in a long-awaited fixed income trading resurgence. During today's analyst call, BofA CFO Paul Donofrio said the bank's exemplary performance in fixed income was more than mere cyclical vapours. It was down to the hard work the bank put in four years ago, said Donofrio: costs at the bank were cut in 2010/2011 and BofA is now reaping the benefits of both the re-positioned business and its strength in primary debt origination.
Unfortunately, this doesn't mean traders at BofA will be paid up on last year. Nor are traders at J.P. Morgan and Citi likely to be rewarded handsomely for their efforts in the three months to September.
The exemplary third quarter simply means that banks now have a hard job of managing traders' pay expectations down between now and January 2017.
This is why.
1. The third quarter was great. The first quarter was not
Yes, banks had a great third quarter in fixed income trading, but if you cast your mind back to February 2016, you will recall that things weren't nearly so pretty. The first quarter was dire. Year-to-date, things are therefore good but not gorgeous.
2. The comparables are terrible
Yes, fixed income traders are having a pretty good 2016 compared to their 2015, but this is only because 2015 was a bad, bad year.
As the chart below shows, all the American banks to report so far had a terrible 2015 in fixed income. Deutsche Bank's Jim Reid points out that banks might be beating consensus in fixed income trading, but this is just because the consensus was that they would do terribly after a long period of poor performance. Of course they're now recovering - just don't expect to get paid because of it.
3. The cost squeeze continues
Then there's the fact that pretty much every bank is in the process of wringing as much as it possibly can out of costs, especially compensation. “Most expenses were lower year over year…this was led by lower personnel expense,” said Donofrio on today's call, echoing pretty much every other CFO everywhere. Witness the chart below (Citi excepted).
4. If there's any spare money, it won't go on traders' pay
Lastly, there's been no let-up in all the other things that consume banks' spare cash.
While FICC revenues have stood still since 2013, FICC infrastructure costs have increased. There are technology investments to be made (Bank of America today became the latest bank to proclaim itself "a technology company"). There are risk and compliance processes to be tightened.
There are also gaps to be filled. During today's call Donofrio declared that BofA's fixed income trading business did well by virtue of the bank's entire, global, cross-product trading platform (thereby implying that BofA falls firmly into McKinsey's 'global universal bank' category). Clients use BofA because it offers everything, everywhere, suggested Donofrio, meaning a) that the efforts of individual traders aren't necessarily that important, and b) that Bank of America's fixed income traders can't expect to be paid to the detriment of its equities traders, who've done rather less well (equities revenues at BofA are down 12% year-on-year).
The good news is that because it needs to be all things to all clients, BofA has been hiring in rates as it strengthens its macro business. The bad news is that those new hires are likely to have detracted from the pool for paying its existing traders.
Your expectations have been managed. Our pleasure.