U.K. Clearing Banks Expect Solid FX Gains In First Half, Despite Treacherous Market


U.K. clearing banks are expecting fairly good results in foreign exchange for the first half of 1992, despite sharp market moves that may have caught many speculators on the wrong side, say bank treasury officials. The volatility of the past six months has generated a lot of trading volume, say bankers, good news for the largely jobbing business of the clearers, which do not do substantial positioning.

"The turnover has been such that someone like us has done reasonably well," says Christopher Bennett, international treasury director at Barclays Bank. "I think that will be reflected in the results. We'll be up on the first half of last year, and I think the result compares well with the second half of last year." Barclays reported foreign exchange trading gains of £99 million in the first half of 1991 and £119 million for the second half of the year, the best performance of the four.

Bennett says Barclays has increased its share of corporate business in Europe, but has seen corporate activity in Japan drop off. Although he says Barclays has done well, Bennett cautions that for many banks, the six month period will not be seen as a good one. "Position taking has been difficult, except perhaps in the last few weeks," he says. "The dollar bulls have had a rough time in the second quarter." And in some of the minor trading centers, he says, the market has seen volatility without volume, never an easy situation.

Dollar Bulls and DM Bears

Officials at other clearing banks basically agree with this assessment. "The British elections generated huge flows," says David Clark, who until next month remains treasury director of Midland Bank (see related article, this issue). "The good turnover means that it has been a good six months; the banks will show good results." Midland, he says, has also "seen some good corporate orders through." Midland posted foreign exchange trading revenues of £86 million in the first half of 1991 and £76 million in the second half, grabbing second place among the big four U.K. clearing banks.

Commenting that the market is now all about capital flows, Clark mentions two factors that have created volume: bond investors unwinding bond-market convergence plays that have come unstuck since the Danish anti-Maastricht vote, and the move from the low interest short-term U.S bonds into higher interest German instruments.

The Danish vote has also prompted a "flight to quality" among currency investors into the Deutsche mark, Clark says. He is expecting that some more speculative banks may have come to grief. "We had too many Deutsche mark bears and too many dollar bulls," he says. "There is a hangover of stale dollar bulls around."

Ted Hogg, senior executive for U.K. treasury at National Westminster Bank, is also optimistic about the bank's showing. "The first six months have not been easy but at the same time we are hitting all our targets," he says. "Market conditions have been a little more difficult than in the past--there has been a lack of liquidity, and the emphasis on counterparty lines makes it sometimes difficult to get out of a position quickly; you have more than just the position to think of."

But as a jobbing bank, NatWest has seen good turnover. "And it is still increasing, despite all of the more pessimistic forecasts: that has to be good for a jobbing bank," says Hogg. He and others say profits for the half have been basically steady. NatWest posted foreign exchange trading revenues of £71 million in the first half of 1991 and £65 million in the second half. Lloyds Bank, which posted forex trading gains of £40 million in the first half of 1991 declined to comment on its performance in the latest period.

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