This Wednesday, Dec. 5, 2012 file photo, shows a Citi Bank sign in Chicago.The Associated Press
They could only dodge the damage for so long.
After bond yields shot higher this spring, creating chaos in the market, many of the world's biggest banks somehow managed to post strong revenues from their fixed-income units last quarter, prompting some investors to think the institutions could navigate through the choppy waters.
That honeymoon has come to an end.
Citigroup, which has a massive bond desk, is the latest bank to warn investors that its fixed-income revenues will be ugly next quarter, the Financial Times reports . They aren't the only bank to say so. Global peers in the same boat include Barclays, Credit Suisse and Jefferies.
The problem, banks say, is that while summers are typically slow, this past summer was abnormally so because the choppy markets convinced investors to sit on the sidelines. That made it very hard for the banks to trade on behalf of their clients.
The sudden reversal comes after Goldman Sachs president Gary Cohn quipped in May that it was an "urban legend" that banks couldn't score big fixed-income revenues in an era of rising rates.
So far the Canadian banks haven't sounded any of their own profit warnings. However, some cracks have already emerged. The past fiscal quarter, which ended in July (the U.S. banks align their quarter with the calendar year), Royal Bank of Canada's trading earnings were hurt by troubles in its U.S. municipal bond unit that stemmed from the sudden rise in yields.
Should the global trend hit Canada, RBC is most likely to be affected, with 54 per cent of its capital markets trading revenues coming from fixed-income over the past four quarters. RBC's fixed-income unit is also much larger than its Big Five peers, drumming up $1.4.-billion in revenue over the same period – more than the next two biggest fixed-income rivals, Bank of Nova Scotia and Bank of Montreal, combined.
Bank of Nova Scotia earned the second most from fixed-income trading over the past four quarters – $561-million – and this revenue accounted for 44 per cent of its capital markets trading income.
By comparison, Citigroup's fixed-income operation generated revenues amounting to $14.5-billion (U.S.) over the same period.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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