Wall Street Trading Revenue Seen Falling 4th Straight Quarter

A surge in market volatility following Japan’s worst earthquake on record and a jump in oil prices may not be enough to keep investment-banking and trading revenue from falling for a fourth consecutive quarter.

Analysts have lowered first-quarter earnings estimates at the biggest U.S. banks, saying trading revenue won’t rebound as much as they had expected from a weak fourth quarter. The outlook for the period fuels speculation that Wall Street is facing a prolonged decline in investment-banking and trading revenue after record figures in 2009.

While firms often benefit from higher volatility and volume, an 18 percent drop in the Nikkei 225 (NKY) Index in the three trading days beginning with Japan’s March 11 magnitude-9 earthquake may mean the events were a negative for Wall Street as banks faced principal losses and nervous investors scaled back trading after an initial swell, analysts said.

“In the very short term, that volatility can have a beneficial effect, but when this comes after what’s been a volatile few years, it ultimately leads to more investors sitting on the sidelines again,” said Richard Staite, an analyst at Atlantic Equities LLP in London. “The benefit in this quarter from more volatility has been relatively modest and generally unhelpful over the medium term.”

23% Decline

First-quarter earnings per share at the five largest U.S. firms by investment-banking and trading revenue -- Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Morgan Stanley -- may fall 23 percent from the same period a year earlier, with only JPMorgan likely to post higher profit, according to the average of 104 estimates by analysts surveyed by Bloomberg.

Total investment-banking and trading revenue at the five banks may drop 25 percent from the first quarter of 2010, according to estimates by Chris Kotowski, an analyst at Oppenheimer & Co. in New York.

The banks are likely to bounce back from the fourth quarter, when they posted combined revenue of $21.1 billion from investment banking and trading. That was the lowest since they reported losses in the fourth quarter of 2008, driven by weak fixed-income trading. Spokesmen for the five banks declined to comment on first-quarter results.

While increased trading as a result of global events likely boosted commissions, most large banks probably suffered principal losses of a “few hundred million dollars” in the first days after the earthquake, said David Trone, an analyst at JMP Securities LLC in New York.

‘Inescapable’ Losses

“Sometimes those general rules have exceptions, and the acute velocity of the decline in Japan over the first few days was something where losses were inescapable,” Trone said. “If you have a big Japanese equities business, those five days were difficult, because you have inventory and your clients ask you to fall on the sword, and that’s a cost of doing business.”

Morgan Stanley (MS)’s profit may be hurt by a trading loss at a Japanese partnership with Mitsubishi UFJ Financial Group Inc. The venture may post a loss of 80 billion yen ($951 million) from bond trading, the Wall Street Journal reported last week. Mark Lake, a spokesman for Morgan Stanley, which owns 40 percent of the venture, declined to comment.

After reporting record investment-banking and trading revenue in 2009, banks had declines in those businesses for three straight quarters compared with year-earlier periods, with the quarter just ended likely to be the fourth. A fall in fixed- income trading revenue, the biggest capital-markets business for the banks, largely spurred the decreases.

‘Tepid Pace’

Aggregate fixed-income revenue for the five U.S. banks and four international rivals -- UBS AG, Credit Suisse Group AG, Barclays Plc, and Deutsche Bank AG -- dropped to $101 billion last year, from a record $146 billion in 2009, according to Glenn Schorr, an analyst at Nomura Holdings Inc. in New York.

David Viniar, chief financial officer of Goldman Sachs, told investors in February that last year’s fixed-income decline will likely end. Revenue from fixed-income, currencies and commodities, known as FICC, fell 37 percent at his firm last year, the biggest drop of any big U.S. bank.

The first-quarter results “could fuel concerns that the tepid pace of the capital-markets recovery coupled with new regulation will impair earnings growth for the capital-market banks in 2011,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “Risk aversion still pervades the market, as clients remain liquid and defensively postured.”

Hintz cut his first-quarter earnings estimates for Goldman Sachs and Morgan Stanley in a March 29 note. He doesn’t cover the other three banks.

Lower Ratings

Atlantic Equity’s Staite said the revenue decline could be more enduring.

“In the aftermath of the financial crisis, you’re going to have a sustained period of uncertainty in the market,” Staite said. “So you could argue that it’s at least a semi-permanent decline in revenue. It could take a few years before we start to rebuild toward the high levels we saw previously.”

Analysts, including Guy Moszkowski at Bank of America, had expected a pickup in the first quarter, similar to last year when Goldman Sachs and JPMorgan reported record fixed-income trading results. Moszkowski cut his earnings estimates last month for Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan, all of which are based in New York. He also lowered his ratings of Goldman Sachs and Citigroup to “neutral” from “buy,” as he said the first-quarter increase in trading was “uninspiring” compared with previous years.

Keith Horowitz, a Citigroup analyst, also cut estimates for trading revenue by an average of 5 percent and investment- banking revenue by an average of 15 percent.

Volatility Index

The earthquake and tsunami in Japan, which caused radiation leaks at the Fukushima Dai-Ichi nuclear-power plant, also triggered a rise in volatility and trading volume. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped to 29.40 on March 16. It has averaged 20.38 over its two- decade history.

Equity-trading volume on the largest U.S. exchanges jumped on March 16 to the highest since July, according to data compiled by Bloomberg. U.S. Treasury dollar volume that same day was the most since September 2008, according to data from ICAP Plc, the world’s largest inter-dealer broker. Volume for the Nikkei index on March 15 was the highest since Bloomberg began keeping records in 1996.

Oil, Protest

The surge failed to lift volumes for the whole quarter. Average daily equity-trading volume on the largest U.S. exchanges fell 8.2 percent from the first quarter of 2010. Dollar volume of high-yield corporate bonds declined 13 percent from a year earlier, while volume of investment-grade bonds rose 8.8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Trading volume, an indicator of performance, may not correlate directly with firms’ revenue because banks make money on changes in the value of the securities they hold and transaction fees that may not be related to volume.

Commodities trading may be a bright spot, driven by uncertainty surrounding political events in North Africa and the Middle East. Crude oil rose $15.34, or 17 percent, to $106.72, in the first three months of this year, the largest quarterly gain since the second quarter of 2009, as anti-government protests swept through at least nine countries, including Libya and Bahrain, and led to the ousters of Tunisian President Zine El Abidine Ben Ali and Egyptian President Hosni Mubarak.

M&A Drop

Trading in commodities is near 2007 highs, and the industry’s fee pool this year could be $3 billion to $4 billion higher than in 2010, Nomura’s Schorr said in a March 23 note to investors, citing a meeting with Robert Rooney and Colin Bryce, trading executives at Morgan Stanley.

“The backdrop for this business is pretty healthy right now, given increased volatility and rising oil prices, which generally leads to increased hedging activity,” Schorr wrote.

Trading and investment banking accounted for 30 percent of the five firms’ total revenue last year, ranging from 68 percent at Goldman Sachs to 21 percent at Charlotte, North Carolina- based Bank of America, according to company filings.

Companies worldwide completed $386 billion of mergers and acquisitions in the first quarter, Bloomberg data show. That compares with $495 billion of deals completed in the fourth quarter and $436 billion in the first quarter of 2010.

Global equity offerings also fell from the fourth quarter, when total underwritings topped those of any quarter since 1999, the year Bloomberg records begin. Companies raised $150.5 billion through share sales in the first quarter, compared with $249.8 billion in the fourth quarter, Bloomberg data show. U.S. bond issuance jumped to $564.4 billion, up from $393.2 billion in the fourth quarter.

JPMorgan shares climbed 9.3 percent this year, and Bank of America’s and Morgan Stanley’s are each up 0.2 percent. Shares of Citigroup fell 5.9 percent, and Goldman Sachs dropped 4.7 percent.

After all the political and tectonic turmoil in the quarter, the Standard & Poor’s 500 Index climbed 5.4 percent in the period, rising for the seventh quarter in the last eight.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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