Banks' FICC Trading Revenue Hitting Low Point, Kelleher Says

  • Morgan Stanley must maintain `credibly sized' bond unit
  • Kelleher sees low global growth as Europe remains subdued

Fixed-income revenue is unlikely to improve from a poor third quarter across the banking industry, though this period may prove to be the low point for that business, Morgan Stanley’s Colm Kelleher said.

“I do think 3Q, and possibly 4Q, is the low point of the cycle in fixed income,” Kelleher, who runs Morgan Stanley’s investment banking and trading division, said at an an investor conference Tuesday in New York. “What I don’t know yet -- and if anyone in this room knows, I’d love to hear it -- is what is the steady run-rate of what we think fixed income should be. What is that number?”

Revenue from fixed-income, currency and commodities trading, or FICC, is on pace to drop to $65 billion this year at the 10 largest global investment banks, according to industry analytics firm Coalition Ltd. That would be the lowest since the financial crisis and less than half what those firms produced in 2009.

Morgan Stanley last month reported what Chief Executive Officer James Gorman called its worst quarter for FICC since he took over in 2010, as revenue plunged 42 percent from a year earlier. While the firm will continue to reduce the amount of capital dedicated to the fixed-income business, it must maintain a “credibly sized” unit to compete as a global investment bank, Kelleher said Tuesday.

‘Subdued Activity’

“The trick for us is to size our business appropriately to what we think the fee pool is, but to make sure we have enough flex or leverage that when the markets recover, which we do think they’ll recover, you’ll be able to participate in the upside of that,” he said.

Kelleher, 58, also said he sees low global growth ahead as Europe will face “subdued activity” and emerging markets including China are unlikely to quickly rebound. Kelleher, an Irishman who also serves as head of Morgan Stanley’s international business, said Europe has major issues in the U.K.’s potential exit from the European Union and how it reacts to increased migration.

While the mix of job applicants from colleges has changed, more new hires come into the firm with the goal of a sustained career in finance, Kelleher said. Junior employees seeking a profession instead of “winning the lottery” represents a return to the way the industry was viewed when he started in the 1980s, he said.

“The business I joined over 30 years ago was a business you joined because you had a career,” Kelleher said. “It wasn’t a business you joined where you got rich quick and could buy a Ferrari at age X. That happened somewhere in the middle, in those leverage years from ’97 to ’07. And if you look at what happened between ’97 and ’07 and around that, we attracted a lot of people who probably should never have been in banking.”

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