Investment banks will struggle to earn the hefty returns they once raked in trading everything from complex derivatives to resources to currencies. In fact, a permanent “structural downturn” looms over the Fixed Income, Currencies and Commodities (FICC) business at many banks, brought on by tighter regulations, nervous investors, and shrinking proprietary trading jobs, reports Reuters.
In the past, FICC desks generated between 40 to 60 percent of investment banking revenues at such banks as Credit Suisse, Deutsche Bank, UBS, HSBC, and Barclays.
But a look at 7 of the largest investment banks saw their FICC revenues drop by 33 percent in the second quarter of 2011. Credit Suisse, for example, was down roughly $8.8 billion. Goldman Sachs, down by 64 percent. Morgan Stanley, down by 36 percent, to name just a few.
And while the fixed income market will remain robust enough to serve the borrowing needs of countries and corporations, some are forecasting a lasting shrinkage in the size of the operations, and accompanying investment banking jobs.
“The business will come back, but it will be 20 to 30 percent smaller than it was. In 18 months time, investment banking headcount will be 20 percent smaller than it is now,” said Anthony Peters, a strategist at Swissinvest.
Some of the scaling back is also due to nervous clients, according to the Reuters article. The hedge funds that used investment banks to act as their prime brokers are also cutting back on their activity, due in part to the roiled markets and political gridlock in Washington and Europe.
With many investment banks winding down their proprietary trading desks due to the new Dodd-Frank legislation, it’s likely that trading activities will never return to the lofty levels we once saw.
One bright spot on the horizon: a banker involved in the fixed income market believes that prop trading in interest rate swaps is still going strong. Something to think about if you have trading aspirations.
What about you? Do you think Fixed Income, Currencies and Commodities (FICC) is an area to shy away from in your search for an investment banking job or step up the ladder? Or are there hidden opportunities? Add your comments below.