Analysts at Deutsche Bank have issued a report on the future of investment banks' fixed income currencies and commodities (FICC) businesses. They said that it doesn't look great if you work for a bank with a negligible market share, particularly if that bank also happens to be European. Moreover, the future may not be totally assured if you work in FICC at Goldman Sachs.
Deutsche analysts have checked their barometers and concluded that a perfect storm is fast approaching banks' FICC businesses. A combination of regulations like Basel III, EMIR and MiFID II in Europe and Dodd-Frank in the US are expected to wipe 15-20% from investment banks banks' profits before tax and 5% from revenues.
The tempest is likely to be worst in Europe, says Deutsche, where the Financial Transaction Tax (FTT) will contribute to the coming headwinds.
"We think that the long-run result of these changes will be a wave of industry exits from FICC sales and trading by second tier players," say the Deutsche analysts. "For the purposes of this report, we view all banks with less than a 6% market share as “at risk” of exit from full-service FICC sales and trading."
As the chart below shows, this places BNP Paribas, Credit Suisse, HSBC, Morgan Stanley, RBS, SocGen and UBS clearly within the FICC danger zone. It also suggests that Goldman Sachs is next in line for a potential FICC pullout. Goldman has a FICC market share of 6.9%, according to Deutsche, down from 10% in 2009.
Is Goldman's FICC market share really that low? Last year Bernstein analysts put Goldman's market share at 7.4% globally.
Goldman Sachs declined to comment. However, there are several factors in the US bank's favour.
Firstly, Deutsche suggests that as smaller mostly European banks with market shares of less than 6% pull out of fixed income sales and trading, bigger banks will benefit. This should push Goldman's market share further above the 6% 'danger zone'.
Secondly, Goldman's FICC market share has recently been on an upwards trajectory - increasing from 6.3% in 2011 to 6.9% in 2012. Goldman's share of fixed income revenues only dropped dramatically between 2009 and 2011, something which Goldman warned would happen. Following the financial crisis in 2009 and 2010, David Viniar - then Goldman's CFO - said the bank was benefiting both from 'unsustainably high bid-offer spreads' and the fact that few rivals were fully active in the fixed income market. The decline in Goldman's market share was therefore an inevitable part of market 'normalization', said Viniar.
Nevertheless, Goldman's FICC professionals may want to keep their CVs burnished. In future, Deutsche Bank said FICC market share will become concentrated in a 'big five' market leaders.
The chart above from Deutsche suggests that this big five includes J.P. Morgan, Barclays, Citigroup, Bank of America and Goldman Sachs. However, when Deutsche itself is included, Goldman is bumped down into sixth place. Last year's analysis by Bernstein suggested that Deutsche had a FICC market share of 9% to Goldman's 7.4%.
In 2011 Goldman COO Gary Cohn made an investor presentation intimating a perilous future for fixed income sales and trading professionals at Goldman Sachs and elsewhere. Over the previous 10 years, revenues in Goldman's equities business had tripled as trading moved onto electronic exchanges, said Cohn. Over that period, Cohn said headcount in Goldman's equities business had halved. Cohn didn't say so explicitly, but the implication was that fixed income jobs could suffer a similar fate as fixed income trading follows equities trading and becomes more electronic.
In yesterday's report, Deutsche Bank said rates trading jobs will be most at risk across the industry: at the moment, the G10 rates business is highly profitable and takes place almost entirely over the counter (OTC). Deutsche said it stands to lose most from a shift onto exchanges. This may be a good moment for rates traders at all banks to start contemplating their future.