Fixed-income, a Good Business for Banks

According to calculations by experts at International Financial Analysts (Afi), fixed-income could provide over €17.3 billion of financial incomes in 2013 –which is a 23% of total revenues. Most of it comes from the ECB’s massive injection of liquidity of the last two auctions.

The “carry trade” business is exactly that: a business. It is common knowledge how it goes: a particular financial institution borrows money from the ECB with 1% interest rate, in order to purchase Spanish public debt, which will provide 4% profitability. This is one of the reasons that explains how fixed-income revenues rose from €12.5 billion in 2009 to €16.5 billion in 2012. And the upward trend continues in 2013.

It is important to mention that financial institutions received a lot of money thanks to these fixed-income operations, because they bought quite a lot of public debt immediately after ECB’s auctions –when profitability curves were in higher levels than now. That is why they have capital gains.

The main problem is that they are “non-recurring incomes,” and their contribution to the net interest income will be increasingly lower, in so far as both the risk premium and the profitability of the public debt drop, and the ECB starts to remove liquidity.

It goes without saying that, in a slightly more stable economic environment and with decreasing profitability of the public debt; credit concession is the key to make the banking business move steadily ahead.