NEW YORK (Reuters) – Trading activity is weak, regulators are cracking down and investment banks worldwide are confronting a gross reality for 2011: the only way to survive and make riches is to diversify.
A week of anemic results in bond and reserve trading from U.S. investment banks reflects a fundamental problem towards the global sector: soft markets and regulatory pressure mean firms want other lines of business — besides trading for clients and with respect to their own accounts — to sustain themselves.
“These companies are looking at markets that be the subject of lost, in some cases, two-thirds of their activity since the height, and it looks like it’s not coming back at all time soon,” said Richard Bove, a veteran bank analyst at that time with Rochdale Securities LLC. “It will take a few years conducive to these banks to adjust.”
In the meantime, they risk disappointing shareholders and generating novel questions about their strategies. Analysts say their shares are generally inferior, even undervalued, amid the uncertainty.
With results from the U.S. majors in a puzzle of the way, attention now shifts to those large European players, the likes of Barclays PLC and Deutsche Bank AG that are expected to express 2010 figures in February. They face some of the same challenges through trading and regulation too.
Those who can point to plans as being a fresh course — as Morgan Stanley has done of recent with wealth and asset management — stand to benefit if those bets pay distant from. The sharp rise in Morgan Stanley’s shares despite wanting profit estimates points to that potential.
“Morgan, if they have power to execute, has some real opportunities here,” said Roger Freeman, banking algebraist at Barclays in New York. Freeman is of the view that 2009 and the at daybreak part of 2010 were “extraordinarily good periods” for fixed income and that things are now settling back to a more ordinary level.
‘EXPOSURE TO EVERYTHING’
Trading revenue, particularly in bonds, was increasingly a improve center for investment banks in the years before the financial conjuncture and even in 2009. Goldman Sachs and Morgan Stanley got a location of their revenue or more from fixed income in the fresh past.
Those revenues declined steadily throughout 2010 — in part for the reason that investors were panicked over the health of European government debt and confused not far from Federal Reserve bond-buying programs.
But there are also structural issues in the manner that Bove suggests like changes in demand and in markets, and investors are increasingly pointing to the destitution for investment banks and banks in general to seek other opportunities.
“You desire to own the big money-centered banks that have a brief bit of exposure to everything, like a JPMorgan, a Wells to a unquestioned extent, and Bank of America,” said Keith Davis, bank analyst and principal at money manager Farr, Miller & Washington in Washington, DC:
Regulatory regimes likewise play a role. The U.S. government is in the heart of implementing the Dodd-Frank reforms that have reshaped financial disposure. There will be more oversight, more limits on risk and smaller latitude to engage in some of the behaviors that were once so lucrative.
“The Volcker rule is slowly forcing those that to this time have proprietary trading desks to close those businesses,” said Ben Wallace, securities algebraist at Grimes & Co., though he added weak markets still had further influence than tighter regulation on driving trading revenue.
The situation is a great quantity the same in Europe, where a number of new regulators are already applying pressure in the form of stress tests and raising the trust of breaking up some of the biggest state-aided banks.
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