• U.S. banks' quarterly revenue shrinks for first time in 2015
  • Third-quarter `more challenging than originally anticipated'

The six biggest U.S. banks collectively eked out revenue gains in this year’s first two quarters. That streak was probably toast in the third.

A global asset rout that squeezed bond trading and kept the Federal Reserve from raising rates drove down the firms’ total revenue 2.4 percent from a year earlier to $101.1 billion in the three months through September, according to analysts’ estimates compiled by Bloomberg. That eroded the increases in the year’s first two quarters that averaged 1.4 percent.

While U.S. banks have fared better than European rivals -- Deutsche Bank AG forecast a $7 billion quarterly loss late Wednesday -- they’ve still been battered by the collapse in commodities and volatility sparked by an August plunge in Chinese equities. Nomura Holdings Inc. analysts estimate Wall Street trading revenue tumbled 6.5 percent in the third quarter and that investment-banking revenue shrank 9 percent, driven by declines in stock and bond issuance. Last week’s disappointing jobs report shows the overseas slowdown may be undermining the U.S. economy.

“The third quarter ended up more challenging than originally anticipated, with increased volatility on one hand and a drop-off in issuance activity,” said Jason Goldberg, a Barclays Plc analyst. “There’s also been this continued pushout for when the Fed ultimately raises rates.”

Depressed Valuations

Bank stocks have been sliding as expectations for a Fed rate hike shift to next year, meaning the industry’s margins will be crimped longer. The 24-company KBW Bank Index tumbled 9.5 percent during the third quarter, worse than the 6.9 percent drop for the broader Standard & Poor’s 500 Index.

Analysts project that revenue declined at five of the biggest banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley -- and that only Wells Fargo & Co. produced a gain, amounting to about 2.8 percent. Trends in reported net income are seen varying after some firms reduced legal costs and other expenses.

Valuations of the industry’s stocks assume no interest rate increases until 2017, according to Matt O’Connor, a Deutsche Bank analyst. That’s a more pessimistic view than in the futures market, where prices indicate the odds of an increase by March are at least 50 percent, according to data compiled by Bloomberg. Higher interest rates can help banks earn bigger spreads on their deposits.

JPMorgan, the biggest U.S. bank by assets, is set to kick off the industry’s earnings reports after markets close on Oct. 13. The New York-based lender may say net income slipped 8.1 percent to $5.12 billion, according to the average estimate of analysts surveyed by Bloomberg. Bank of America, scheduled to report Oct. 14, may report that it swung to a $4.23 billion profit after legal costs pushed it to a year-earlier loss. Wells Fargo, which discloses results about an hour later, may post a 4.7 percent decline to $5.46 billion.

Profit at Citigroup may jump 45 percent to $4.13 billion, after its year-earlier earnings also were affected by legal costs, according to analysts. They project a drop of 24 percent to $1.7 billion for Goldman Sachs. Both New York-based firms report on Oct. 15. Morgan Stanley’s reported net income may decline 21 percent to $1.33 billion when it announces results Oct. 19.

Cost Focus

Within fixed income, JPMorgan and Citigroup will fare better because of an emphasis on rates and currencies trading over credit and mortgages, where widening spreads “presented challenges,” Macquarie Group Ltd. said in a note to clients this week. Bank of America previously blamed credit and mortgages for flagging bond-trading results.

Given the outlook for interest rates, investors will be eager to see which banks can control expenses, Barclays’s Goldberg said.

Signs of that pressure already abound: Citigroup has sold businesses abroad, and Bank of America is cutting about 200 jobs across its trading and banking divisions, people with knowledge of the plans said last week. And a new step by Goldman Sachs may save a little money: Releasing earnings on its own website instead of Business Wire, a company owned by Berkshire Hathaway Inc.

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