Brexit boost offers only cold comfort for bank traders

* Brexit provides boost to trading volumes

* Banks also able to extract better margins

* Longer-term revenue outlook remains bleak

By Patrick Graham and Anjuli Davies

LONDON, July 5 (Reuters) - A one-off boost from dramatic market moves after Britain's vote to leave the European Union will only briefly relieve pressure on profit targets for banks' trading businesses struggling with razor-thin margins and universally low interest rates.

Senior (Other OTC: SNIRF - news) managers with some of London's big banking players told Reuters that currency businesses were as much as 15-20 percent behind their profitability targets for this year prior to huge moves in sterling and other currencies in the wake of the Brexit vote on June 23.

Managers from three of the top six banks in this year's Euromoney survey of market share, while declining to be named, said they had seen trading volumes up to 4 or 6 times higher than usual on the night of the referendum result.

Currency trading platform EBS has said that daily volumes at least doubled to top $200 billion while spot trading in currencies on platforms owned by Thomson Reuters (Dusseldorf: TOC.DU - news) jumped by three times.

"Obviously if there is more client activity even just in the short-term that will help," said the head of currency trading with one of the top 10 foreign exchange banks in London.

"It (Other OTC: ITGL - news) is no secret or surprise that the macro or fixed income space has been pretty tough for most of this year. The challenge is will we really see more client activity over the summer if the political situation remains this uncertain."

Geopolitical shocks like the Brexit vote can spur more volatile moves in currencies which in turn lead to banks charging clients higher spreads or margins to the interbank rates available to them at a given time on the market.

Traders say that even last week, several days after the vote, spreads were still 30-50 percent wider than the norm. On the night, on sterling against a variety of other currencies, they were up to several times that.

Individual banks rarely break down the performance of their forex trading arms but a number of the bankers who spoke to Reuters said that big London-based operations which run large books in sterling were best positioned for the Brexit mayhem.

"It was a sterling-led event and you would naturally expect those global houses with strong sterling capabilities to be the best positioned to help their clients," said Lisa Francis, Head of Corporate FX Sales Europe at Barclays (LSE: BARC.L - news) .

GOOD TIMING

Data from industry analytics firm Coalition in late May showed trading in fixed income, currencies and commodities (FICC) divisions declined 28 percent year-on-year to $17.8 billion (12.3 billion pounds).

Bond volumes in particular have suffered from the lack of returns and absorption by central bank buying of much of the paper that would normally be traded on the open market.

"Five or six different heads of FX businesses I've spoken to have said they were 15-20 percent down going into this thing so it came at a good time," said the global head of foreign exchange trading with one of the banks.

"Typically these are the slow summer months. We may see more action from the central banks over the summer that will keep people heavily involved. That gets us into the US election. So I think volatility won't be as high but it will be higher."

A number of the analysts who look closely at banks for investors, however, predict the revenue outlook for the rest of the year will get even worse because of the Brexit vote.

Analysts from Citi and JP Morgan argue that lenders will have to wear the huge falls in the value of some of the assets on their books around the vote -- up to 40 percent in some stocks, more than 10 percent on sterling itself.

There is also the potential that a more sustained equity market sell-off may follow in the months ahead.

Likewise, if banks generally have been struggling to make money with bond yields at rock bottom, they have only gone lower since the vote.

"Primary, and to a lesser extent secondary volumes, are now likely to be subdued for some time on heightened economic, political and market uncertainty," Citi analysts said in a note last week

"This uncertainty, together with the associated market volatility, is likely to greatly reduce the number of deals and transactions which complete in the market." (Editing by Keith Weir)