2017 was not a good year to be a trader in an investment bank. J.P. Morgan's fixed income trading revenues fell 16% versus 2016; Goldman Sachs' fell nearly 30%. At Deutsche Bank, equities revenues were down nearly 20% over the same period.
2018 should be better. At least the banking analysts at KBW think so. In a new report, they predict that total trading revenues for the median bank will rise nearly 11% year-on-year in the first quarter. They also identify the three banks you might want to work for during a full year's trading resurgence: Morgan Stanley, UBS, and Credit Suisse. The likes of Goldman Sachs and J.P. Morgan are conspicuously lacking.
KBW's analysis has nothing to do with trading technology (where Goldman Sachs would argue it's preeminent) or with market leadership (where J.P. Morgan might put up its hand), and everything to do with preparedness for making the most of volatility and an ability to turn trading revenues into a boon for the bank as a whole.
KBW's analysts don't exactly say so, but if you're a trader, the implication is that Morgan Stanley has become the new Goldman Sachs. Both banks derive around 33% of their overall revenues from trading and stand to benefit from higher volatilty. However, while Goldman has been floundering in recent years, Morgan Stanley has surged ahead.
Morgan Stanley's inclusion in the top three is partly a reflection of the excellent work done by the bank's sweary head of fixed income trading, Ted Pick. Pick fired 25% of the bank's fixed income traders in 2015, improved the velocity of its capital, and revivified a business that had long been second rate. Under Pick, KBW's analysts point to the fact that Morgan Stanley has taken fixed income market share from rivals, and that it now has a FICC (fixed income currencies and commodities) market share higher than Goldman's.
It's not just Pick though, it's also the calibre of Morgan Stanley's management team overall. KBW notes that Morgan Stanley's management has a proven "ability to execute," and is more likely to make the most of volatility when it comes. Equally, they claim that if markets pull back than Morgan Stanley should be better able to navigate the fallout, while Goldman's investing and lending division is likely to suffer.
While Goldman says it will benefit as volatility returns, KBW's analysts are therefore gunning for Morgan Stanley instead. Maybe Goldman needs to get itself a Ted Pick.
UBS's sales and trading business didn't exactly have a great end to 2017, but KBW's analysts like it just the same. They think UBS's trading business is, "highly correlated to changes in volatility" because of its focus on FX and institutional clients. As volatility returns, so therefore should trading revenues at UBS.
Credit Suisse's inclusion on the mini-list is surprising given its focus on high yield trading, which isn't exactly expected to thrive as rates rise. KBW's analysts don't care: they think Credit Suisse's strength in securitized products will help offset any high yield feebleness. They're also reckoning on last year's big investments in equity derivatives at the Swiss bank bearing fruit.
Credit Suisse still has some costs to take out this year, but KBW's analysts suggest that the, "disruption from its restructuring programme is coming to end," leaving the bank well placed to benefit as volatility rises. They think too that increased client activity should set up a virtuous circle with Credit Suisse's wealth management business, benefiting the whole bank in the process.
While Morgan Stanley, UBS and Credit Suisse are KBW's top picks for a sustained rebound in trading, the analysts are pretty enthusiastic about Deutsche Bank and Goldman Sachs in the first quarter. As the chart below shows, both banks are expected to see massive year-on-year increases in their fixed income trading revenues in the first quarter, although Deutsche Bank's immiserated equities business is expected to suffer another revenue decline in constant currency terms.
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