U.S. and European investment banks will confront increasing volatility in the months ahead after generating lower income from fixed-income, currency and commodities and equities in the final quarter of 2021.

Lower FICC income

Eleven of 13 banks tracked by S&P Global Market Intelligence booked year-over-year declines in FICC income. The banks include U.S. giants Goldman Sachs Group Inc., Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley, and European players HSBC Holdings PLC, BNP Paribas SA, UBS Group AG, Credit Suisse Group AG, Deutsche Bank AG, Société Générale SA, Barclays PLC and Natixis SA.

Swiss bank UBS and France-based Natixis booked increases of 12.77% and 4% in FICC income in the quarter, respectively, while European peers Credit Suisse, Barclays, BNP Paribas and Deutsche Bank saw double-digit declines. In the U.S., Morgan Stanley, Citi and JPMorgan also booked double-digit drops, while BofA and Goldman Sachs saw declines of 6.92% and 0.80%, respectively.

FICC, equities and banking all suffered a slowdown in the fourth quarter of 2021 versus the preceding nine months, financial market analysis provider Tricumen said, adding that only the FICC segment suffered a sharp drop.

Challenging market conditions including lower volumes and tighter bid-offer spreads in credit impacted FICC revenues, Anish Ailawadi, senior director and head of investment banking practice at business intelligence provider Acuity Knowledge Partners, told Market Intelligence. There was also weakness across products, especially macro products, versus the highs of the year-ago quarter, Tricumen partner Darko Kapor said in an email.

Macro products began the first quarter of 2022 well and most banks struck positive outlooks in advisory and underwriting markets, according to Kapor. All was strong until geopolitical tensions arose as Russia invaded Ukraine, Tricumen said in its review.

The most immediate hit would be on primary and issuance volumes, emerging markets credit and rates. Banks have seen extreme risk aversion by clients, resulting in sharp drops in M&A underwriting and equity and derivative capital markets activity, according to Kapor.

While UBS had a buoyant quarter, with its equities income also rising 3.94%, local competitor Credit Suisse performed the worst among banks in the sample. Credit Suisse, dogged by costly exposures to collapsed U.S. hedge fund Archegos Capital and British specialty financer Greensill Capital (UK) Ltd., exited prime broking and pared down investment banking in a strategy shift announced in November 2021. Its FICC and equities income fell 37.03% and 24.50%, respectively.

Decline in equities income

Half of 12 banks in the sample reported lower equities income in the quarter. Germany-based Deutsche Bank was excluded since it exited the business as part of a restructuring that started in July 2019.

Goldman Sachs' income slipped 11.10%, as did that of JPMorgan by 0.79%. Citi, BofA and Morgan Stanley booked increases of 0.61%, 3.49% and 12.75%, respectively.

France's Natixis booked the worst decline among banks in the sample of 40.16%, while domestic peers SocGen and BNP Paribas reported the highest increases of 18.50% and 17.30%, respectively. HSBC and Barclays, the two British banks in the sample, booked declines of 4.34% and 7.56%, respectively.

Equities income also shrunk due to normalization, albeit less severely than FICC. The dip can largely be attributable to a decline in trading volumes and lower revenues from derivatives and cash products, according to Acuity's Ailawadi. Growth in prime services offset declines in equity derivatives, Kapor said.

Volatility presents opportunities

Economic reopening, the declining unemployment rate in the U.S. and earnings rebound can provide a cushion against volatility, Girish Bhise, CEO and founder of capital markets research provider ValueAdd, told Market Intelligence. However, a sudden rate hike could be "demand-destructive" and cause "underutilization" that could ultimately hit sales, Bhise said via email.

While lower trading volumes may continue, FICC revenues could stand to gain from the heightened volatility and increasing rates. Equities income is expected to be moderate year over year in 2022, considering the tensions, economic growth and inflation, Ailawadi said.

"An increase in interest rates and geopolitical friction do bring in some uncertainties, but so did the COVID-19 pandemic in 2020, which was followed by historic M&A and fundraisings," according to Ailawadi.