UBS's retreat from lucrative fixed income markets around the world is unlikely to be followed by its rivals, although rising costs and tougher regulations make more deep cuts at other banks inevitable.
The Swiss bank is ditching most of its debt business — selling bonds to investors and trading them — in a revamp that will cost 10,000 jobs and free up much-needed capital.
Others have shrunk the business too, but are reluctant to chop it out altogether, as it has long been the biggest revenue earner for most investment banks.
Instead, the likes of Royal Bank of Scotland and Nomura have taken the axe to their equities business, where flagging trading volumes and thin margins have hurt income.
More investment banks will now have to choose between businesses as they juggle tougher capital demands and high staff and technology costs.
But fixed income is such an essential part of investment banking that cutting it out may be attractive only to those, like UBS, that can make money in other parts of the firm.
"We don't need fixed income to exist. We have a very big private bank and are strong in equities trading and deal advisory," a senior UBS banker said. "For others, fixed income is a bigger proportion of their activity."
Even at the Swiss bank, fixed income, currencies and commodities (FICC) was the biggest contributor to the investment bank's revenue in the third quarter. It brought in 20 percent more than a year ago, though UBS's drive to hire new staff in fixed income in 2010 has pushed up costs.
However, such business cannot achieve consistent, reliable profits. During the financial crisis UBS ran up losses of $50 billion in its trading business, including fixed income, forcing the Swiss government to rescue the Zurich-based bank.
Post-crisis regulation is hitting fixed income particularly hard, and banks have to put up more capital against the debt securities they hold for trading, prompting many to scale back their fixed income business.
In addition, a ban on firms trading with their own money in the United States means fixed income revenue is unlikely to reach historic highs again; and ultimate profits from fixed income can be volatile.
The market is still adjusting to lower levels of activity after the crisis and many bankers say there is still overcapacity. Only those banks with large market share can overcome these problems.
"Actually we did well in fixed income this year, but it was seen as more temporary, while in the longer term our market share will probably not be big enough to make it work," said another UBS banker.
ONLY THE BEGINNING
Top fixed income players in Europe — such as Barclays and Deutsche Bank — may even be strengthened by UBS's retreat. This could allow them to expand their market share yet further, convincing them to hold onto the business.
The German bank said on Tuesday that a reduction in capacity was "a good thing."
Nomura has made fixed income the cornerstone of its business, as it strong Asian investor base helps it to increase revenues. Barclays, Deutsche Bank and Nomura have all had to cut back in equities trading, however.
At others banks such as Credit Suisse or Morgan Stanley — which like UBS have played catch up with bigger fixed income rivals in the past two years — the division may come under greater scrutiny.
Credit Suisse in particular has already cut in fixed income and shrunk assets to free up capital, and like UBS is under constant pressure from Swiss regulators to tone down the riskier parts of its business.
Even so, repeating UBS's bold move will be a tough call. Of its FICC unit, UBS is keeping only foreign exchange and precious metals, as well as a very small secondary trading business to support a reduced team in debt capital markets, the business that advises on bond issues.
It is even eliminating the team that helps governments issue bonds, a business many rivals still see as fundamental because of the prestige it lends.
Many also believe a global bank lending retreat will force more companies to turn to bond markets for borrowing. But that business is harder to capture without a trading operation, making banks unwilling to cut too deeply.
If they do not chop out fixed income, however, deeper cuts are likely to follow at other divisions such as equities or commodities trading to satisfy investors disappointed by poor returns, bankers said.
"It's only the beginning. Investment banks just can't afford to do everything anymore," said a senior executive at a rival firm from UBS.
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