Investors should sell Goldman Sachs Group Inc. (GS:US) and Deutsche Bank AG (DBK) because a bear market in bonds will hurt trading revenue, analysts at Societe Generale SA (GLE) wrote.
Investors should buy UBS AG (UBSN), while Morgan Stanley (MS:US) and Credit Suisse Group AG were given hold ratings, analysts including Andrew Lim wrote in a note today that began coverage of the five firms. Fixed-income trading revenue will drop by “low-single-digit” percentages, while equity trading climbs by the same amount, the analysts said.
The Federal Reserve’s decision to taper its monthly bond purchases probably will lead to lower prices for similar assets, the analysts wrote. Revenue from fixed-income, currencies and commodity trading, or FICC, probably fell to $73 billion at the 10 largest global investment banks in 2013, about half the level of 2009, according to industry analytics firm Coalition Ltd.
“We expect FICC weakness to be an ongoing structural theme -- not a temporary issue -- in a rising U.S. long interest-rate environment,” the analysts wrote. More money will move into equities “as investors veer away from the bond bear market,” they said.
Regulatory limits on leverage will force Goldman Sachs to curtail its capital return policy and Credit Suisse (CSGN) to take more actions to boost its ratios, the analysts wrote. Goldman Sachs and Morgan Stanley, both based in New York, probably will show they hold more risk-weighted assets after regulators review their trading books, pushing down their capital ratios, according to the note.
“There is no getting away from regulatory pressure and the burden it places on investment-bank business models,” the analysts wrote, predicting that those firms will underperform commercial lenders.
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