Nov 15 Bernstein Research painted a grim picture
of the future profitability of fixed income, currency and
commodity trading and said the industry was likely to shrink
and consolidate further over the next five years as it faces
more regulatory requirements.
Regulators around the world are now demanding investment
banks hold a capital cushion against a wider range of risky
assets than before, hurting trading margins and profits.
Only firms with proper scale, technology and trading
discipline will be able to earn their cost of capital, but will
still not have robust returns on equity, Bernstein said on
The big investment banks can no longer leverage large
amounts of capital to earn their rates of return, and would have
to reduce costs and modify balance sheets to boost profit
margins at their trading units, the brokerage said in a note to
Bernstein said it expected headcount and compensation to
fall, with firms paying out just 40 percent of their revenue in
salaries, down from 50 percent currently.
Bernstein said its analysis suggested that firms will need
to trim risk-weighted assets on their trading books by 33
percent in the United States and 25 percent in the European
UBS AG is planning to cut most of its trading
unit, while Credit Suisse Group AG, Goldman Sachs
Group Inc, Bank of America Corp and Morgan
Stanley have already taken steps to shrink trading
expenses and automate their business models.
Firms that can earn a higher revenue yield on trading assets
are immersed in a game of attrition, Bernstein said, and those
able wait out the challenges will benefit from lower competition
and improved pricing.
For a BREAKINGVIEWS column on the challenges facing trading