Banks' 'FICC' market trading in second-quarter points to ongoing squeeze

LONDON (Reuters) - Hopes the worst is over for big banks' financial market trading look premature, with the latest snapshot of earnings and volumes suggesting the pressure on these operations remains intense.

With post-crisis regulatory changes forcing them to hold more capital and liquidity, effectively meaning they are less able to trade, banks' fixed income, currency and commodity (FICC) trading desks are unlikely to be expanded any time soon.

The first quarter is traditionally the most active and profitable for banks' FICC trading, as clients put cash to work at the start of the year.

Even so, FICC revenues trended down as much as 5 percent in the second quarter from the same period a year ago, and were 25-30 percent lower than in the first quarter, according to financial industry analytics firm Coalition.

"FICC revenues for the Coalition Index will decline in Q2 this year versus Q2 last year, and the first half versus the first half last year," said George Kuznetsov, head of research and analytics at Coalition.

"We don't see any significant hiring sprees this year as the revenue growth simply isn't there. Banks have an interesting decision to make given lower revenues and stable costs."

This comes on the back of a relatively strong performance in the first three months of the year, which had given cause for cautious optimism that the tide might be turning.

The Coalition Index tracks the performance of the world's 10 largest investment banks, and unlike the banks themselves, it breaks down FICC revenues into their categories. The fully updated index will be published on Sept. 4.

Coalition's Kuznetsov said the weakness was predominantly in G10 interest rates trading, as the "significant" growth triggered by the European Central Bank's 1 trillion euro bond-buying stimulus program in the first quarter evaporated.

U.S. VS EUROPE

The three months to June was a particularly volatile period. Greece lurched perilously close to crashing out of the euro, a "flash crash" in the German government bond market sent global bond yields soaring, and China's stock market fell sharply.

Yet rather than boosting trading activity, as rising volatility often does, traders and investors drew in their horns.

"This uncertainty slowed the momentum we saw in the first quarter and kept clients on the sidelines in currencies and emerging markets," JP Morgan chief financial officer Marianne Lake said on a call with analysts after the bank's Q2 results earlier this month.

Revenue from the bank's FICC business fell 10 percent on an adjusted basis, not a great result but not as bad as some of its peers -- Goldman Sachs's net revenue from FICC trading fell 28 percent to $1.60 billion.

Yet U.S. banks continue to increase market share at the expense of their European counterparts.

The European earnings season is a few weeks behind the U.S. equivalent, and not all the continent's major banks have reported yet.

Barclays PLC , one of Europe's biggest banks and the third largest foreign exchange bank in the world, this week said its FICC income fell 11 percent in the second quarter to 554 million pounds. Its credit and equities trading held up better.

Coalition's analysis showed that trading in mortgage products and credit markets across the banks it tracks was down around 15-20 percent on the same period a year ago.

The picture was much brighter in foreign exchange, where client activity and bank income rose. But that was driven by hedging activity via options and forwards trading. Outright spot market trading fell.

Earlier this week, the Bank of England and New York Federal Reserve released their latest FX trading volume data.

Daily trading in London fell 8 percent to $2.48 trillion in the six months to April, driven by a 13 percent slump in daily spot volumes to $973 billion a day.

Daily volume in North America averaged $881.21 billion, down 20 percent from the previous survey in October, thanks to a 25 percent slump in average daily spot transactions to $426.99 billion.

The latest figures from FX settlement system CLS, which is used almost universally by the banking industry to process or settle foreign exchange trades, show that volume has fallen in recent months.

The average daily input volume submitted to CLS in May was 1,138,576 trades, down 4.7 percent from 1,194,817 a month earlier, while the average daily input value slipped 0.6 percent to $4.61 trillion.

As recently as November last year the global FX market was turning over some $5.17 trillion a day through 1,385,840 trades, according to CLS.

(Editing by Catherine Evans)