Citi profits up despite fixed income squeeze

Tim Wallace
Follow Tim

Citi today reported a rise in first quarter profits – but as revenues dipped, the rise in profits is more based on falling costs than improved incomes.

It is the third major bank to report a real crunch in fixed income revenues and mortgage business, a trend which looks set to sweep the sector.

Citi made $3.94bn (£2.36bn) in the three-month period, up four per cent on the year.

At the same time its revenues fell one per cent, and its profits were dragged up by a one per cent drop in operating expenses and a 20 per cent dive in bad loan provisions.

A big dent in the bank’s fortunes came in fixed income, where revenues plunged 18 per cent to $3.85bn. Fewer firms need the bank top underwrite their bonds, while bond trading revenues were also weak.

Regulations too are squeezing the business they do and the margins they make. This fits the results published so far. JP Morgan was first out of the blocks with its first quarter finances, on Friday.

It too reported poor fixed income earnings – JP Morgan’s fixed income, commodities and currencies business saw revenues fall 19 per cent on the year. Analysts at Moody’s believe this is driven by regulation and will squeeze the whole sector.

“As firms adapt to new regulation, they have reduced flexibility within their trading operations. Tighter leverage constraints are restricting inventory capacity and the size of matched books,” analyst Peter Nerby said in a note out today.

“Financing cost has risen sharply and is less available for less liquid positions because of more punitive risk weightings. Finally, restrictions (such as the Volcker rule) limit management’s hedging and trading discretion.”

Moody’s solution? Cutting costs. The squeeze on traders is back.