Investment banks’ trading needs better disclosure
Investment banks offer a plethora of detail on awards and league-table credits in their quarterly results. But they provide only the broadest information on their all-important trading divisions, which generate more than two-thirds of industry revenues. Shareholders should demand greater transparency.
Most bulge-bracket firms just give nebulous comments on market conditions. In its second-quarter results, Morgan Stanley alluded to the “challenging trading environment” in credit and rates (government bonds), while JPMorgan noted “lower results” from these divisions. Credit Suisse gave an indication of the relative size of its trading businesses, but didn’t provide specific figures.
Some banks are more forthcoming. UBS provides quarterly revenue figures for key areas — cash equities, derivatives and prime brokerage in equities; and credit, rates/forex and emerging markets in fixed income. The UK lenders go a little further, with HSBC and Royal Bank of Scotland separating out revenues for their rates and forex businesses.
The figures are enlightening. UBS’s numbers show that its emerging market desks bore the brunt of the pain in fixed income in the second quarter: revenue tumbled 70 percent to 73 million Swiss francs ($69 million). Meanwhile, the $1.5 billion that HSBC made trading government bonds and interest-rate products in the first half was well over twice what it made in the second half of 2009.
It’s hard to understand the reticence of other houses. By the time results are released, anything that can be gleaned by rivals from past trading performance is old news. Perhaps the worry is that once a firm starts disclosing a figure, it can’t easily revert to giving less information. Currently, weak performance by any given trading unit can be hidden from view.
There are few other industries where there is so little transparency about such a big slice of the revenue pie. That may well be one reason why global investment banks trade at just 8.4 times next year’s forecast earnings, according to Thomson Reuters. If investors had a better sense of where those earnings came from, they may be willing to pay more for them in future.