Fixed-income business turns ugly for U.S. banks

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Rocky bond markets continue to dog the biggest U.S. banks, raising fears about what the future will hold as the Federal Reserve exits its enormous bond buying program.

For the second straight quarter, banks such as Citigroup and Goldman Sachs saw their fixed-income arms suffer from weak trading volumes and investor uncertainty, even though the Fed has barely started to curtail its monthly bond purchases.

Banks typically group their fixed-income businesses with currencies and commodities for reporting reasons, and Goldman's "FICC" business posted its worst year since 2005 The equivalent arm at Citi saw revenues fall roughly 15 per cent in the fourth quarter as well as from the same period in 2012, while Bank of America Corp.'s full-year FICC earnings dropped 15 per cent from 2012.

The frustrating thing for the banks is that there isn't much they can do to revive these businesses. "It's not that we've got something that's broken and needs to be fixed," John Gerspach, Citi's chief financial officer, told the Financial Times. The bank attributed its fixed-income weakness to softer client activity, especially for credit and spread-related securities.

Goldman noted that its own unit benefited from tighter credit spreads, but investors remain spooked by economic uncertainty so trading activity "generally remained low."

The weakness is such a worry because fixed income often comprises a big chunk of revenues for the biggest banks. While areas such as investment banking typically steal media headlines, fixed income typically churns out much more revenue.

At Citigroup, FICC brought in revenues of $13.1-billion in 2013. Investment banking – which includes equity and debt underwriting as well as mergers and acquisitions – had revenues of $4-billion.

The question for Canadian bank investors is whether the weakness will spread. It's hard to think it won't, considering so many banks are plagued by the struggles. Royal Bank of Canada and Bank of Nova Scotia have the biggest exposures to fixed-income. RBC in particular was already dinged by choppy markets in 2013.