Wall Street’s fixed-income trading desks welcomed a rare return of volatility. It probably hasn’t been enough, though, to ensure decent profitability for Goldman Sachs, JPMorgan Chase and Morgan Stanley in the quarter that just ended. They would need to generate up to $12 billion of extra revenue among them trading bonds, foreign exchange and commodities to achieve a return on equity of 15 percent.
The fixed-income teams cannot do it alone. Revenue is usually lower in the second half of the year. The recent pickup, from shifts in central bank activity to Bill Gross’s surprise departure from the bond giant Pimco at the tail end of the quarter, will make only so much difference.
Goldman, for one, would have to rake in an additional $4 billion in annualized bond trading revenue to increase its 10.9 percent return on equity in the first six months of this year to the more respectable 15 percent level. That’s calculated by folding back in taxes paid at a 30 percent rate and applying the 25.8 percent pretax margin generated by Goldman’s combined fixed-income and equities trading, which the bank doesn’t report in isolation.
On that same basis, Morgan Stanley would need to produce an extra $6 billion of annualized fixed-income revenue to bring up its 8.4 percent return, after stripping out a tax gain. That’s six times what its traders turned out in the second quarter. Counterparts at Barclays would have to produce about $3 billion more to bolster that bank’s 5.7 percent return on equity. JPMorgan, whose investment bank posted a 13 percent return in the first half, would have to find another $1.8 billion, and Deutsche Bank, with a 14 percent return, just $450 million.
The figures call into question the idea that the business is merely in a cyclical slump. More aggressive cost-cutting might, therefore, be necessary. It perhaps explains how Bank of America beat rivals in the first half with a 37 percent pretax margin and a 14.3 percent return on equity from its fixed income and equities traders.
Bank of America and Deutsche’s broader businesses, though, are stuck with mid-single-digit returns. Across the industry, investment bankers, brokers, wealth managers and lending professionals will have to step up even more. The traders may have carried them nearly as far as they can.
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Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.