Good news for pay: the fourth quarter may NOT be a write-off

Given the Ireland's ill-fortune and endless uncertainty over the durability of the eurozone, it's reasonable to think the fourth quarter for banks is going to be a repeat of the third: ie. miserable.

In fact, this may not be the case.

Dirk Hoffman-Becking, senior analyst at Bernstein Research, says banks weren't totally submerged by the sovereign debt crisis in October and November. In fact, he says, they did ok.

Dirk cites several symptoms of this wellness, including:

· The risk on/risk off trade didn't return in a big way. Equity index trading volumes were well below May 2010.

· Credit trading held up well. Volatility fell slightly in Europe and the US. Bid-offer spreads were flat to up. Credit spreads increased month on month across investment grade products. All should be good for credit trading revenues.

· Increased rates trading in November, particularly in the on-exchange sector. Revenues from yield curve trades are expected to improve as the yield curve steepened slightly again.

· FX trading volumes increased month on month in November (albeit they were lower than May). Widening bid offer spreads weren't associated with an increase in volatility. This should help market making profits.

· Equity markets improved and looked stronger year on year.

· Relative to the paltry preceding months, ECM activity was stronger in both Europe and the US. DCM activity slowed sharply due to the sovereign debt crisis, but it didn't slow as sharply as in May.

According to Hoffman-Becking, the only downside in the past few months has been M&A, where activity slowed "somewhat." According to Reuters, European M&A was down $5bn month on month in November. Europe's share of global M&A deals for the year so far is at its lowest level since 1998.

Conclusion: the fourth quarter is not great, but nor is it a complete write-off. At this stage, its implications for pay ex-M&A are likely to be broadly neutral.