If you work in credit trading at Barclays, you can - in theory - feel pretty pleased with yourself. If you work in credit trading at Nomura, you cannot.
At Barclays, credit trading revenues rose 46% (yes) year-on-year and 65% (yes) quarter-on-quarter.
Nomura doesn't break out its credit trading revenues specifically but we do know that they resembled Barclays' by about as much as a sausage resembles a kangaroo. Overall fixed income trading revenues at Nomura fell by 76% year-on-year and by 66% quarter-on-quarter. Nomura said credit trading was to blame, and that "rapid spread widening" led to "under-performance in spread [credit] products."
The disparity between the two banks' performance raises several questions.
Years ago, analysts at Bernstein research produced a chart depicting the curious consistency of fixed income trading revenues at Barclays' investment bank. That chart has since vanished into the ether, but could do with an airing today as everyone ponders how Barclays' credit traders achieved such a strong result in such a difficult quarter.
A Goldman Sachs banking analyst asked precisely this question on this morning's call.
Barclays' CFO, Tushar Morzaria, gave a fairly opaque response.
Now that Barclays doesn't hold a large credit inventory and is all about vanilla flow trading, spread changes don't really impact the bank's profitability, said Morzaria. At the same time, Morzaria said Barclays benefited from a rising share of debt capital markets (DCM) transactions in the last quarter, that these fed through to increased secondary credit trading volumes, and that Barclays' benefited from increased credit trading volumes generally. In the presentation accompanying Barclays results, the bank added that improvements in its credit business were mostly in the U.S., where the "flow business" did well.
Morzaria's explanation is curious on several counts. Firstly, figures from Dealogic suggest Barclays lost rather than gained market share in DCM in the first quarter - both in the U.S. and globally. How could increased market share drive volumes therefore? Secondly, figures from Sifma show U.S. bond trading volumes declined by 2% in the first three months of 2016 versus the previous year. And thirdly - as Deutsche Bank analysts point out - most U.S. banks performed badly in credit trading in the first quarter. How did Barclays suddenly beat them on their own territory?
Nomura's fixed income results are also curious. By any measure, the Japanese bank's fixed income business had a truly awful quarter. By comparison, Nomura's equities business looked blooming. Equities sales and trading revenues at Nomura were up 5% quarter on quarter and down 1% year-on-year.
And yet it's the equities business that's being closed at Nomura, while the fixed income sales and trading business whose revenues are down 76% year-on-year is being kept open. Why? Could it have something to do with the fact that Steve Ashley, head of global markets at Nomura, comes from the fixed income side of the business?
Lastly, the disparity between the two banks' results and the volatility in their fixed income revenue streams suggests fixed income trading cannot be relied upon if you're a CEO building a business that will generate a solid return on equity and low cost income ratio.
Banking analysts suggest as much: Chirantan Barua, banking analyst at Bernstein Research, says Barclays' credit results are "likely to be a one off" and that not too much should be read into them for this reason.
With Barclays vigorously promising to pull "all levers" to cut the cost income ratio in its investment bank and to increase returns above the cost of capital, this sounds ominous. Just because Barclays' credit trading business outperformed in Q1, that doesn't mean it will outperform in Qs two, three or four.
If Barclays' credit trading revenues had fallen by 13% last quarter along with its equities and macro trading revenues, overall revenues in Barclays' corporate and investment bank (CIB) would have been down by 10% instead of 4% and profits would have fallen by 35% instead of 31%. More to the point, the cost income ratio in the CIB would have been 73% instead of 69% - which looks unacceptably high given Barclays' target of 60% across the group.
During today's call, Morzaria and Barclay's CEO Jes Staley said repeatedly that the bank is looking at ways of cutting pay in the CIB. Whatever Barclays' credit traders did to increase revenues in Q1, employees across the investment bank need to hope they can pull it off again during the rest of the year. Pay at Barclays will almost certainly be cut anyway, but without that mysterious credit trading magic it will need to be cut by a lot more.