Though income has been only modestly higher than the same period last year, the numbers have prompted cautious optimism from analysts holding out hope for a return to trading returns last seen before the 2007/08 financial crisis.

Earnings so far from the five leading U.S. banks and Credit Suisse (>> Credit Suisse Group AG) in Europe show that revenue from fixed income, currencies and commodities (FICC) almost doubled from the previous quarter to $17.1 billion (£11.44 billion).

Quarter-on-quarter improvement was to be expected, given that the first three months of the year are typically the strongest for investment banks as cash is put to work. However, analysts have been encouraged by FICC numbers that were flat year on year. FICC accounts for about half investment banks' revenues.

Total revenue at the U.S. quintet and Credit Suisse from FICC, equities and investment banking fees was $34.98 billion, up a modest 5.9 percent from the same period last year, according to Christopher Wheeler, U.S. banks analyst at Atlantic Equities.

"FICC is showing some signs of life but that is because rates are back, commodities are back and there's been more volatility surrounding events like the Swiss franc cap. This is positive given the dull FICC markets in recent years," Wheeler said.

The first quarter has been notable for the Swiss National Bank's removal of its cap on the Swiss franc, the European Central Bank's trillion-euro bond-buying quantitative easing (QE) programme, speculation over U.S. interest rates and a rollercoaster ride for oil prices.

VOLATILITY BOOST

This has created the type of price fluctuation and market volatility that traders thrive on, offsetting the seemingly perennial downward pressures on trading revenue from tighter regulation, dwindling liquidity and increased automation in financial market trading.

FICC revenue at the top 10 global banks has risen year on year only once since 2009 and is down about 50 percent overall since then, data from industry analytics firm Coalition shows.

In that light, this year's first-quarter stagnation has been greeted by some as a welcome development.

"With higher volatility and continued support from euro zone QE, we believe that the investment banking earnings cycle is at a turning point," Citi analysts wrote in a note on Tuesday.

The big winners have been Morgan Stanley (>> Morgan Stanley) and Goldman Sachs (>> Goldman Sachs Group Inc), with revenue up 15 percent and 10 percent respectively year on year, while Citi (>> Citigroup Inc) registered a fall of 11 percent, Atlantic Equities analyst Wheeler said.

Credit Suisse, the first big European bank to report first-quarter results on Tuesday, posted FICC revenue up 8 percent year on year. Barclays (>> Barclays PLC), HSBC (>> HSBC Holdings plc) and UBS will all report by May 6.

Revenue from other banking activities also showed signs of life. Equities income was up 23 percent while advisory and capital markets revenue gained 11 percent, a Reuters analysis of results at the big five U.S. banks shows.

Global M&A deals this year had topped $1 trillion by April 8, the earliest the threshold has been reached since 2007, according to financial data provider Dealogic.

"Low rates have translated into a surge in mergers and an increase in currency trading, both big money makers for investment banks," BlackRock's Global Chief Investment Strategist Russ Koesterich said.

"We see the favourable environment for this sector continuing and would remain overweight in large, global financial firms."

(Editing by David Goodman)

By Anjuli Davies and Jamie McGeever