The 4 things that wise bankers need to watch for in banks' 3rd quarter results

It's that time again. Tomorrow, JPMorgan kicks off banks' third quarter reporting season. Citigroup follows on October 15th, Bank of America on the 16th, Goldman Sachs on the 17th, Morgan Stanley on the 18th, and so on.

If you want to be forewarned about issues that might impact your job and pay, this is what we suggest you watch for.

1. The impact of regulatory fines on pay

This applies especially to JPMorgan. The U.S. bank is facing up to $11bn in penalties and had a litigation reserve of only $3bn. JPMorgan has been generous when paying its investment bankers in the past. That could now change. Unfortunately, the bank has stopped breaking out investment banking pay and headcount specifically, so any hits to pay may not be immediately obvious.

2. Changes to fixed income sales and trading revenues everywhere, but especially at JPMorgan, Goldman Sachs and, Morgan Stanley

As everyone out to know by now, fixed income hasn't had a great third quarter. Deutsche Bank, Citigroup, Jefferies, Barclays and others have all made negative statements about the performance of their fixed income currencies and commodities (FICC) businesses in the third quarter (click the chart from Goldman analysts below for a full record of their prognostications).

JPMorgan's results will be interesting, however, because the bank appears to have bucked the trend and said revenues across its investment bank were flat in Q3 - either fixed income didn't suffer, or it found extra revenues elsewhere. Goldman's results will be interesting because the bank has been unusually silent about its fixed income business in the third quarter - did it make money while everyone else took a bath? Morgan Stanley will be interesting because after years of poor performance, the U.S. bank achieved an excellent 56% year-on-year increase in FICC revenues in the second quarter. Has it managed to maintain performance against a very challenging background?

3. The performance of the rates business specifically in the third quarter 

At the start of 2013, analysts at Deutsche Bank forecast that this would be a difficult year for banks' rates businesses, where they said revenues could fall by as much as 50%.

Unfortunately, it seems that Deutsche Bank may have been right. Tricumen, the financial analysis company, thinks rates revenues fell 40% in the first nine months of 2013 (see the chart below.) How do banks plan to deal with this slump? Rates traders may want to make some preemptive career moves.

Source: Tricumen

4. Margins 

In the past few years, banks have increasingly issued cost targets. This is particularly the case at European banks (Credit Suisse, Barclays, HSBC), where costs have been perceived as a problem. However, in an environment where the high margin fixed income trading business is being squeezed, costs are likely to be front of mind at all banks. Faced with inelastic non-compensation costs, declining profitability in Q3 could prove a catalyst for big bonus cuts or further job losses before the end of the year.