Money-Centers' Income from Currency Trading Shrinks

NEW YORK - Revenues from foreign exchange trading by money-center banks fell in the third quarter from record levels a year earlier, and in most cases slipped from the second-quarter pace as well.

"The attitude that foreign exchange earnings are an area of uninterrupted growth" is no longer valid, said David Gilmore, senior analyst at MCM CurrencyWatch.

Citicorp had the highest third-quarter foreign exchange revenue at $123 million, down from $214 million a year ago and $155 million in the 1991 second quarter.

Trend Was Profitable

The dollar's downtrend last quarter gave banks some room to make money, analysts said. The dollar fell to 1.6664 marks and 132.97 yen at the end of the quarter from 1.8105 marks and 137.45 yen at the beginning.

The dollar rose in early July, nearly reaching 1.84 marks, on expectations of a solid U.S. economic recovery. But concerted central bank intervention on July 12 helped bring the dollar back down. And weak U.S. economic data released as the quarter progressed sent the dollar lower.

The descent was interrupted by a spike up to 1.8250 marks on Aug. 19, the day of the Soviet coup.

"A good deal of the [dollar's] trend was predictable, so good trading outfits could catch some part of it," said Scott Pardee, chairman of Yamaichi International (America) Inc.

Several factors limited banks' trading income, analysts said. First, volume slipped, as banks around the world curtailed their trading activities. This retrenchment made banks "unwilling to take on the level of risk with inhouse positions that they used to," Mr. Gilmore said.

In addition, worries about the health of some U.S. banks may be sending some customers to foreign banks for their currency needs, he said.

The Soviet coup had little impact on banks' foreign exchange earnings, said Tom Barman, director of CDC Capital Inc., the U.S. trading arm of the French bank Caisse des Depots et Consignations. "Probably some people got hurt and some people got helped. But [the coup] didn't generate a trend" for the dollar, he said.

Assessing the current quarter, Mr. Barman said trading volume has been relatively small so far, thus profits may suffer. "In general, it hasn't been a real active period for banks or their customers. Earnings will probably reflect that, but it is too early to know with any kind of certainty," he said.

Recovery Seen Next Year

Mr. Gilmore said bank foreign exchange earnings will probably bottom out this quarter and next and then recover.

But rapid earnings growth seen in the late 1980s, "probably won't be continued. Banks will have to find niches" such as options trading, he said.

Banks are increasingly assigning traders to develop long-term strategic positions in the currency market, Mr. Gilmore said. In addition, banks are setting up currency investment funds, allowing them to earn trading commissions and share in the funds' profits.

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