By Pam Graham of NZPA

Wellington, March 4 NZPA - Volatile financial markets have helped fell the world's biggest banks but have also been the source of record profits for bank dealing rooms, including in New Zealand.

It is an irony that extreme volatility in markets hurts many businesses but is also an opportunity for those who work in markets.

It is not a new phenomenon, say bank analysts.

More customers seek protection when markets are volatile and this provides volume for banks, said KPMG's head of banking and finance Godfrey Boyce.

"Just straight volatility in exchange rates or interest rates provides trading rooms with the opportunity to make money in terms of the margin on customer business," he said.

Banks also make money from trading, particularly intraday, he said.

"They see a trend and get in and out and take a very short position and profit from it," he said.

Banks also get market value gains on their fixed interest securities holdings in a falling interest rate environment.

Last year interest rates fell sharply and consistently as central banks cut rates by unprecedented amounts in response to the global credit crunch.

"It was a very favourable environment for trading rooms because of the sustained fall. For three months interest rates were only going one way," Mr Boyce said.

ANZ's chief executive Mike Smith told analysts last week that the Australian bank's global markets division had performed better than expected.

"Global markets has achieved record income based on the volatile conditions and customer flows with the strongest result coming from Asia, New Zealand and Europe/Americas," Mr Smith said in a market update.

ANZ's New Zealand subsidiary ANZ National declined to comment on its institutional bank's performance ahead of its interim result on April 29.

But $263 million of ANZ National's $1.163 billion profit in the year to September 2008 came from its institutional unit. This was up from $216m a year earlier.

The institutional bank includes the markets division, which provides foreign exchange services as well as origination, underwriting, and risk management services.

It also includes corporate finance and the provision of financial services to large institutions.

ANZ National's institutional bank profit rose when its earnings from its retail bank fell from $521m in 2007 to $446m in 2008.

A breakdown of BNZ's $369 million operating profit before tax in the three months to December 31 showed $215m came from BNZ Capital, the institutional part of the bank.

The bottom line BNZ profit of $260m in the three month period was up from $171m in the same period the previous year.

The issue in the future will be whether the bonanza from markets continues for banks when interest rates and currencies bottom out. Australia's benchmark interest rate was held by the Reserve Bank of Australia this week.

ANZ's Mr Smith said that when volatility went out of the market his bank's strong markets performance would reduce.

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