London: While many governments struggle to get their debt under control, some banks are seeing stronger profits because of a rebound in their debt-trading businesses.
Swiss lender UBS on Tuesday became the latest to surprise investors with better-than-expected first-quarter earnings. The bank had net income of $2 billion, its highest quarterly profit in almost three years, mainly thanks to a recovery of debt trading.
UBS rivals like JPMorgan Chase, Morgan Stanley and Goldman Sachs all presented healthy earnings last month, helped by blossoming trading of debt, commodities and currencies. Low interest rates are prompting clients to refinance their debt while sharpening investor appetite for higher-yielding investments.
The current sovereign debt crisis in Europe, with Greece at its epicenter, has added to volatility in the markets, further helping banks' trading activities. And with fewer competitors after Lehman Brothers and others fell victim to the credit crisis, there is more business to share among fewer firms.
"It's undeniable that the shape of the yield curve is positive for investment banking revenue," Ian Gordon, a banking analyst at Exane BNP Paribas in London, said, referring to rising yields on debt instruments, reflecting the higher risk of holding these instruments. "These conditions would probably continue for the foreseeable future."
But the speed of the recovery is raising questions among some investors about the sustainability of the rapid growth at trading divisions. Interest rates will not remain at record low levels forever, and financial regulation—currently under discussion by the Group of 20 countries—could curb income at the businesses.
In its outlook, UBS acknowledged on Tuesday that there was "some market uncertainty" because of "concerns relating to European sovereign debt."
The bank said it was "credit in particular" that led to increased revenue at its debt, currency and commodity business in the quarter. UBS' investment banking division quadrupled its pretax profit from the previous quarter.
The upbeat figures stand in contrast to the increasingly grim budget deficits across Europe and in the US.
Some analysts said the European Central Bank could start buying government bonds to support debt markets.
"The ECB could come in in the absence of investors," said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland in London. Banks' "trading books wouldn't be the primary concern," he added, but they might benefit.
Gary Jenkins, head of credit research at Evolution Securities in London, said it was "impossible to quantify" how much banks benefited while governments piled on more debt to rescue their economies and as they struggled to cut debt now.
Last year, Goldman Sachs helped London manage three gilt sales and worked on a $2 billion sale of bonds by the Bank of England to finance Britain's foreign exchange reserves, according to Bloomberg data.
©2010/THE NEW YORK TIMES