LONDON -  In casinos, confidence begets danger when overly-assured gamblers double down rather than call it quits. Investors in investment banks have similarly suffered punitively low returns due to bosses’ confidence that market volatility will soon pick up. Recent market ructions will reveal whether a cyclical upturn is near – or whether structural decline has further to run.

Trading fixed income, currencies and commodities (FICC) has historically brought in around half of global investment banking revenue. So the 11 percent decline in total FICC revenue to $68 billion last year was largely responsible for dragging total investment banking revenue down 4 percent to $150 billion – the lowest total since 2008 – according to Coalition data released on Friday.

In truth, returns from FICC trading are worse than investment banks’ average 8.6 percent return on equity last year suggests. That figure – which sinks to an even drearier 7.8 percent once non-core assets are included – was propped up by buoyant bond and equity issuance and advisory work, where total revenue increased by one-tenth to $40.6 billion.

Calm markets and reduced trading volumes have exposed high costs as repeated rounds of belt-tightening have failed to keep up with a shrinking top line. FICC revenue has declined by almost 8 percent a year on average since 2012. By contrast, FICC headcount – a rough proxy for costs – is down just 5.4 percent a year over the same period.

That effect should work in reverse if recent volatility in equities spills over into trading foreign exchange, bonds and commodities. Wall Street stands to benefit the most from any pickup: U.S. investment banks’ market share has increased by 10 percentage points to 60 percent over the past decade, mostly at the expense of European rivals, according to New Financial.

That’s reflected in valuations. Shares in Goldman Sachs have risen by 5 percent this year and are close to record highs; the Thomson Reuters U.S. Financials Index is up 1.3 percent over the same period. By contrast, shares in Europe’s biggest trading houses – Deutsche Bank, Barclays and Credit Suisse – have underperformed the STOXX Europe 600 Banks Index. Shareholders in the latter clearly need more convincing that any boost to earnings is more than a lucky one-off win.

CONTEXT NEWS

- Global investment banking revenue declined by 4 percent to $150.4 billion in 2017 according to figures published by data provider Coalition on Feb. 16.

- Revenue in fixed income, currencies and commodities was $68 billion, down 11 percent year-on-year, while equities revenue fell by 4 percent to $41.8 billion. By contrast, revenue from M&A and capital markets activity increased by one-tenth to $40.6 billion.

- Average investment banks’ return on equity, excluding non-core businesses, fell by 90 basis points to 8.6 percent.

(Editing by Peter Thal Larsen and Liam Proud)

© Reuters News 2018