UPDATE: For Banks, Euro Crisis Meant Less Trading Revenue In 1Q

The impact of the euro crisis continued to hit banks' trading revenue in the first quarter as jittery investors pulled out of bond, currency and related markets.

Goldman Sachs Group Inc. (GS) and State Street Corp. (STT) reported Tuesday their trading units, which include foreign exchange, suffered from lower revenue and volume during the period.

Foreign-exchange trading volumes have fallen broadly around the world as the European sovereign-debt crisis has scared off investors. Global volumes collapsed at the end of 2011 and into early 2012, the Bank for International Settlements said in March.

Early reports from banks during this week's earnings season hint at ongoing weakness in currency markets.

At State Street, first-quarter foreign-exchange revenue fell 7% from a year earlier, contributing to a 7% fall in trading-services revenue, to $280 million. The bank blamed worried investors for the general slowdown in trading.

Over all, State Street earned $427 million during the quarter, down from $471 million in the previous year's quarter. It posted revenue of $2.42 billion for the first quarter, up 2.5% from a year earlier.

Goldman said first-quarter net revenue from its fixed income, currency and commodities unit fell to $3.46 billion, 20% below last year's comparable quarter.

"Our currencies business benefited from stronger performance in our emerging-markets businesses," said David Viniar, Goldman's chief financial officer, in a conference call with analysts. The unit's best results came from interest-rate products, with other bright spots in mortgages and credit, he said.

The uncertainty surrounding the euro zone's fiscal troubles has kept trading clients away from the markets, Viniar said, calling the unit's performance this quarter "good but not great."

"Our clients have been cautious on risk and remain cautious on risk," he said, noting the problems are "macroeconomics-driven."

World-wide average daily currency-trading volume hit $4.7 trillion in 2011, up from $4 trillion in 2010, but that figure masks the market's diminished flows at the end of the year, the BIS said.

Goldman is less worried about a major financial disaster in the debt-scarred euro zone, Viniar said.

"We believe the probability of a tail event in the euro area has materially decreased" since the European Central Bank instituted the latest round of its Long Term Refinancing Operation program last month, offering cheap loans for banks to buy troubled sovereign debt, Viniar said.

While the European turmoil has forced some banks in the region to sell assets around the world, Goldman hasn't been able to take full advantage of these openings because the overall market continues to sputter, Viniar said.

"Some of the European institutions have exited certain businesses, and that's helpful, but it's hard to really see that because there's not enough of an improved flow," he said.

-By Chana R. Schoenberger, Dow Jones Newswires; 212-416-4803; chana.schoenberger@dowjones.com; @djfxtrader

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