Trading revenues at the world's leading investment banks continued to grow in the second quarter, extending their gains from the previous three months, when the coronavirus pandemic triggered extreme volatility spikes in the capital markets.
Most major U.S. and European institutions recorded growth in second-quarter revenues on both a quarter-over-quarter and an annual basis, S&P Global Market Intelligence data shows. Eleven out of the 13 tracked banks booked a year-over-year increase in total trading revenues and eight out of the 13 recorded higher revenues than in the first quarter.
U.S. groups Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. posted the highest growth rates in total trading revenues in the quarter of 93.11%, 73.21% and 67.34% year over year, respectively. French groups Natixis and Société Générale SA were the only two investment banks in the sample to post annual revenue declines of 75.06% and 28.76%, respectively.
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FICC boom
Fixed income, currencies and commodities, or FICC, trading was the main driver for the second-quarter gains of almost all banks, with most of them posting double- and even triple-digit growth rates versus the prior year. Natixis was the only bank to post a year-over-year decline, of 8.22%, in second-quarter FICC revenues.
Morgan Stanley posted the largest year-over-year increase, with FICC revenues up by 167.70%. French group BNP Paribas SA, Goldman Sachs and Switzerland-based UBS Group AG also posted triple-digit revenue growth of 153.78%, 148.82% and 118.30% year over year, respectively.
FICC revenues were boosted by the strong performance of most products in the segment, with macro products seen as the main driver. Both foreign exchange and rates revenues surged on investors' continued appetite for hedging amid the volatile market environment, financial market intelligence company Tricumen said in its second-quarter capital markets report.
Commodities revenues also booked strong gains over the second quarter, chiefly due to oil and precious metals trading, global consultancy McKinsey & Co. said in its global investment banking report for the first half of 2020.
The quarter was also positive for credit, with investment grade and high-yield products booking the majority of the gains, according to McKinsey. Tricumen noted a continued rise in "demand for emerging market bonds from yield-starved asset managers ... as attention shifts away from safe assets." Distressed assets and collateralized loan obligations, or CLOs, which were among the hardest-hit by COVID-19, were on the way to recovery but still underperformed in the second quarter, Tricumen and McKinsey said.
U.S. dominance
Despite booking some of the highest growth rates in the second quarter, European banks continued to lag behind U.S. peers, with the top five American players accounting for the bigger share of the FICC and equities revenue pool, according to the market analyses. The U.S.-Europe gap in equities continued to widen because of the fortunes of the three French banks — BNP Paribas, Société Générale and Natixis — which have struggled especially with their equity derivatives business. The equities trading decline at the three banks continued from the first quarter in the second, chiefly due to structured derivatives losses, Tricumen said.
Scale, product diversification and regional mix were among the main drivers of the outperformance of U.S. banks compared to their counterparts across the Atlantic, McKinsey & Co. said. U.S.-based groups outperformed European banks in both equity derivatives and cash equities trading in the second quarter, according to Tricumen.
Equity derivatives trading, which accounted for a major part of equities revenues, was led by the American banks given that the majority of sector growth was generated by U.S. flow products where European banks tend to have a smaller presence, McKinsey & Co. said.
Outlook
Revenues in the second half of 2020 are expected to grow at a somewhat slower pace than in the first six months of the year, but markets will remain volatile. The continued government and central bank support will give capital markets a boost but economic uncertainty and fears of a second wave of COVID-19 may dampen sentiment, according to market observers.
"As we enter the autumn, the big question is, what is the probability of a second wave this winter?" Johanna Kyrklund, chief investment officer of U.K.-based asset manager Schroders, said in a recent podcast. A second virus wave or the discovery of a vaccine earlier than anticipated could drive volatility in the second half, she said.
Geopolitical themes could also sway investor sentiment, French asset manager Amundi said in a second-half market outlook.
"As the global economy gradually de-freezes, investors will turn their focus back to geopolitics. The climax will be the U.S. presidential election — the outcome of which appears increasingly open," Amundi Chief Investment Officer Pascal Blanqué and Deputy Chief Investment Officer Vincent Mortier wrote in their analysis.