By Steve Slater
LONDON (Reuters) - Faced with a recent decline in revenue from their bond and interest rate trading activities, some banks have already been cooling expectations over their next set of results.
More than half of an investment bank's profits often comes from activities such as trading bonds and interest rate products, yet a confluence of negative factors means revenue in such areas could fall by a fifth or more this quarter, some analysts estimate.
Testimony about the effects of the downturn in the three months through September 30 has been emerging from banks on both sides of the Atlantic.
Britain's Barclays <BARC.L> has warned of a sharp slowdown in trading bonds and other instruments, while Credit Suisse <CSGN.VX> has said volatile fixed-income conditions had exacerbated a normal seasonal slowdown.
Deutsche Bank's <DBKGn.DE> third-quarter fixed income, currencies and commodities (FICC) revenue is likely to be down 31 percent on the year to 1.6 billion euros ($2.2 billion), according to Kian Abouhossein, analyst at JPMorgan.
Deutsche will warn of the slowdown on Wednesday, the Financial Times said. Deutsche declined to comment.
The same forces have been felt in the United States, where investment bank Jefferies has said its fixed-income revenue had slumped after "a very challenging summer".
Behind the downturn is an outbreak of uncertainty over U.S. monetary policy, which sapped activity over the summer just as regulatory pressure squeezed banks' risk-taking activities.
July and August were weak across the industry and there appears to have been little sign of a late surge in September to limit the damage before the end of the quarter on Monday, analysts said.
FICC revenues for the quarter are set to be down 26 percent from a bumper period a year ago, and down 13 percent from the second quarter, Abouhossein estimated, while Richard Staite, analyst at Atlantic Equities, expects FICC revenues to fall by 20 percent on the year across the industry.
The lull in bond market trading has been blamed on expectation the U.S. Federal Reserve would start "tapering" its bond buying programme, though the Fed last week surprised investors by holding off on the start of the process.
IMPOSSIBLE TO REPEAT
But banks are also scaling back their leverage and the size of their balance sheet in all areas, including rates and credit, under regulatory pressure.
Investment bank earnings can be the most volatile part of a bank's results and are being watched for clues on how cost cuts and restructuring are reshaping the competitive landscape. The fight is on among top names to grab market share from banks that are retreating, such as UBS <UBSN.VX> and Royal Bank of Scotland <RBS.L>.
FICC is investment banks' bread-and-butter activity and typically accounts for more than half their revenue. Quarterly FICC revenues topped $40 billion at times in 2009 and 2010, but in more normalised markets and with leaner businesses that will be nearly impossible to repeat, analysts reckon.
Banks pulled in $26 billion from FICC in the second quarter and $36 billion in the first quarter, or half of the $122 billion in total investment bank revenues, according to Morgan Stanley analysts.
The way banks report fixed income revenue is not always comparable, but analytics firm Tricumen estimated Citi <C.N> was the leading FICC bank in the first half, with revenue of $7.4 billion delivering a pretax operating profit of $3.6 billion.
Deutsche Bank and Barclays are Europe's top fixed income firms and each gets about 55 percent of their investment bank revenue from FICC.
Barclays last week said income in July and August was down 500 million pounds ($802 million) from a year ago, mainly due to its FICC woes. Daily income improved in September, but was still down on a year ago - indicating its FICC income could be down up to 30 percent from the 1.7 billion pounds it achieved in the third quarter of 2012.
UBS last year announced plans to pull back in fixed income, where it was under strength, and with equities and advisory revenues faring better in the current quarter, the leaner UBS and other firms that are less reliant on bond trading should have outperformed rivals, analysts said.
Revenues from both equities and advisory are expected to be slightly up on the year, but down on the second quarter, with advisory business swelled by a flurry of big deals in September after a slow July and August.
The major U.S. banks report from October 11 onwards. Most big European banks report in the last week of October. ($1 = 0.7412 euros) ($1 = 0.6237 British pounds)
(Additional reporting by Clare Hutchison and Katharina Bart; Editing by David Holmes)