Barclays looks set to report some of the most impressive results of the first-quarter earnings season in its bond and stock trading division, thanks in large part to bumper profits in credit trading, according to sources familiar with the matter.
Barclays made more than US$500m in revenues in global credit trading in the first three months of the year, according to one of the sources. That’s an increase well north of 100% compared to the first quarter of 2019 and makes Barclays a clear outperformer in credit trading during the most volatile period for debt markets since the financial crisis of 2008.
The UK bank, which is due to report its first-quarter results on April 29, is also set to follow its US rivals in reporting strong gains in macro trading (where it buys and sells products linked to interest rates and currencies) and equities, sources said. That could put Barclays on course to report the sharpest annual gain in trading revenues among the major investment banks for the quarter. A Barclays spokeswoman declined to comment.
A surge in volatility and trading volumes on the back of the coronavirus-inspired slump in financial markets triggered a trading bonanza for investment banks this year, with many reporting substantial gains in fixed-income units as well equity derivatives operations. That contrasts starkly with the financial crisis of 2008, when banks suffered many billions of dollars of losses on complex structured credit and equity derivatives trades.
All five of the largest US banks reported strong trading quarterly earnings last week. Citigroup’s markets business notched the largest revenue jump versus the previous year – up 37% to US$6.5bn – while JP Morgan’s trading revenues rose 32% to the highest overall total – US$7.2bn.
Goldman Sachs was alone among the big five US banks in singling out credit trading as a significant driver behind a sharp jump in fixed-income revenues in its first-quarter results last week.
European banks aren’t due to report first-quarter earnings until later in April.
Barclays' trading division is smaller than those of its US rivals, bringing in roughly a third of the revenues JP Morgan did last year. But so far this year it has punched well above its weight in credit, a unit that buys and sells bonds, derivatives and other products linked to corporate debt.
The UK bank's first-quarter credit trading gains were mainly in the US and came despite some of its traders losing money on corporate bond holdings as prices slid in March.
Global head of credit, Adeel Khan, placed a large management-book hedge using credit-default swaps and other index products, according to sources, which earned hefty profits when markets declined. Drew Mogavero, co-head of US credit at the bank, and his team also made money trading CDS and other credit-linked products, the sources said.
Trading CDS was potentially a very lucrative business. The first three months of the year saw record volumes in CDS of almost US$4trn across the market, according to ISDA. That contrasts with the losses many banks sustained on corporate bond holdings, several sources said.
Goldman Sachs made around US$70m on its European desk trading credit index products such as CDS, one source said.
"We benefited from significantly higher client activity in more liquid index CDS products and notably in client portfolio trades, which more than offset the impact of wider credit spreads amid lower liquidity in cash product trading inventory," Stephen Scherr, Goldman's chief financial officer, said on an earnings call.
Elsewhere, Credit Suisse’s European high-yield trading desk headed by Hamza Lemssouguer made tens of millions of dollars trading CDS and other credit products in the early months of 2020. That comes after Lemssouguer netted about US$120m last year for the bank following a series of prescient calls on faltering corporate credits.
The Swiss bank said in mid-March that its trading revenues so far in the quarter had been significantly higher than over the same period last year.
Barclays’ macro unit is also set to report large revenue increases, while equities should be another bright spot for the bank, sources said. Barclays’ equity derivatives business had reached roughly two-thirds of its revenue target for the whole year by the end of March, one source said.
That follows a string of impressive results from US banks in this space as traders have capitalised on the spike in stock market volatility. Citigroup, Goldman Sachs and JP Morgan all mentioned equity derivatives when reporting equities trading gains of 39%, 32% and 28%, respectively. Bank of America also highlighted its strong trading performance in the more volatile market environment alongside its own 39% revenue increase in equities trading.
Additional reporting by Steve Slater