The third-quarter sales and trading figures for many banks make brutal reading. There has been widespread carnage as flows have evaporated in the face of acute sovereign distress and wildly dysfunctional capital markets. Both debt and equity sales and trading revenues have been hit – blows that in some cases could be fatal. And the sobering truth is that controversial credit value adjustments are masking the true extent of the damage in many cases.
The headline numbers are, in themselves, bad enough. For example, RBS had a terrible quarter in debt sales and trading, with volumes collapsing 60% year on year, from €1.1 billion in the third quarter of 2010 to €473 million. It didn’t fare much better in equities, where volumes were down 45% to €130 billion. Bank of America also had a grim quarter in debt, with business down 51% to €1.2 billion. Goldman Sachs was down 40% in debt to €1.2 billion but made up for it in equities where trading volumes grew 10% to €1.6 billion.
Unlike debt sales and trading, where it was a case of trying to minimize the damage, several firms had a good quarter in equities – JPMorgan and Credit Suisse growing volumes by around 20% and Morgan Stanley seeing a stellar jump from €704 million to €1.3 billion.
But how much can investors really trust the numbers? The lesson of recent reporting has been to always have a very large dose of salt to hand.
Number crunching by a source close to Euromoney shows that once one-off events, derivatives valuation adjustments and gains or losses on the fair value of the firm’s own debt are taken into account, the picture can be very different. RBS, Bank of America and UBS have seen debt sales and trading volumes crater by between 70% and 90%. And Citi has had a particularly rough quarter in equities, with volumes realistically down much more than the 43% drop reported. Morgan Stanley’s doubling of equities business vanished as well.
Banks have endured a quarter of unprecedented sovereign chaos and extreme trading volatility. In most cases they are still making money, even after the adjustments.
But at a time of such uncertainty, trust becomes important. The big problem for banks right now is that, in a ridiculous accounting environment not of their own making, no one trusts their numbers. And with funding difficult to come by already, that’s just making it even harder.