Starting next week, banks will begin reporting their results for the third quarter. This is a brief reminder not to get too excited. It is also a brief reminder that a difficult third quarter is often followed by redundancies in the fourth quarter as banks cut costs before year end. Brace yourself now.
James Mitchell, an analyst at Buckingham Research, has updated his previous gloomy prognosis about banks' performance in the three months to October 2018. Mitchell's latest assessment is less dire than last month's (Eg. He now says announced M&A fees were down 14% year-on-year in Q3 instead of the 26% he estimated previously), but it's not exactly reassuring either.
Using changes in trading volumes, spreads and volatility as a proxy for revenue changes by business, Mitchell suggests that most trading desks will have had a bad quarter compared to Q3 2017. The only exceptions are equity derivatives and rates derivatives desks.
Similarly, Mitchell thinks investment banking divisions had a feeble third quarter too. As the second chart below shows, he says equity capital markets fees, debt capital markets fees and M&A fees are all down on the same period of last year - although ECM and DCM might be spared because they had a great September.
Needless to say, none of this seems to bode entirely well for banks that are already cost constrained and hoping that rising revenues will alleviate the need for more aggressive cutting. Bank of America is already thought to have trimmed a few staff in London recently. If Mitchell's right, there may be a lot more of this to come.
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