Wall Street Trading Revenue to Decline as ‘Year to Forget’ Ends
Some of Wall Street’s biggest firms signaled optimism in October after posting their worst trading and investment-banking period since the financial crisis. Now, analysts say the fourth quarter may have been worse.
Fixed-income trading revenue at U.S. banks may fall 12 percent from the third quarter, minus accounting adjustments, while equities drop 10 percent and investment-bank revenue will probably be unchanged, David Trone, an analyst at JMP Securities, wrote in a Dec. 16 report.
Some analysts had expected a rebound after the third quarter was the worst for trading and investment banking since 2008, when the collapse of real estate markets contributed to a worldwide credit crunch. Now many are looking ahead to 2012 after investors stayed on the sidelines amid concern that the European debt crisis would lead to a global slowdown.
“We’re in a difficult environment,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said yesterday on Bloomberg Television’s “In The Loop” program. “I really don’t think anyone’s going to be focusing on the earnings of these firms. They’re really going to be focusing forward.” Hintz is a former Morgan Stanley treasurer.
Twelve analysts cut earnings estimates (GS) for Goldman Sachs Group Inc. in the past four weeks and 14 trimmed theirs for JPMorgan Chase & Co. (JPM), according to data compiled by Bloomberg. Goldman Sachs, which gets the majority of its revenue from trading, may post its lowest annual net income after preferred dividends since 1998 and the least revenue since 2005, Roger Freeman, a Barclays Capital analyst, said in a note titled “Another Year to Forget.”
Trading revenue at the five biggest Wall Street banks -- JPMorgan, Goldman Sachs, Bank of America Corp. (BAC), Citigroup Inc. and Morgan Stanley -- may drop from a year earlier for the sixth time in seven quarters. Trading and investment-banking revenue fell 47 percent in the third quarter from the first three months, excluding accounting adjustments.
Richard Staite, an analyst at Atlantic Equities in London, said a weak fourth quarter and the sovereign debt crisis in Europe will “rapidly” turn market attention to the banks’ outlooks for next year.
“Goldman and Morgan Stanley (MS) will struggle to paint an upbeat picture of 2012,” Staite wrote in a note this month. “With no sign of a clear solution to the problems in Europe and a deteriorating economic backdrop, it will be hard for the pure investment banks to predict the timing of any upturn.”
Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, 57, said last month that global growth will “snap back” faster than most forecasters expect. He said he didn’t know when that will happen.
JPMorgan CEO Jamie Dimon, 55, said at an investor conference this month that revenue at the investment bank will probably be unchanged or down from the third quarter. He said that the decline may be cyclical.
“I don’t think you should look at the business and say, ‘OK that’s permanent.’ It’s not permanent,” Dimon said on Dec. 7. “We service a lot of investors. Those investors are going to have twice as much money 10 years from now than they have today to invest. And they’re going to need to invest their money.”
Financial firms globally have announced plans this year to eliminate more than 200,000 jobs. New York-based Morgan Stanley, the sixth-biggest U.S. bank by assets and owner of the world’s largest brokerage, said last week it will cut about 1,600 jobs in the first quarter of next year.
Firms are also cutting pay. Annual compensation on Wall Street may fall 27 percent to 30 percent from a year earlier, making it the lowest level since 2008, according to New York- based recruitment firm Options Group. Bonuses on average may drop 35 percent to 40 percent, Options Group said.
The Standard & Poor’s 500 Financials Index (S5FINL) has fallen 20 percent this year, led by Bank of America’s 61 percent plunge. Goldman Sachs, Morgan Stanley and Citigroup have all fallen at least 45 percent, while JPMorgan has dropped 24 percent.
Bank of America Chief Financial Officer Bruce Thompson said in October that the markets had been better that month than in August and September. Morgan Stanley CFO Ruth Porat said the challenging credit-markets conditions had “hopefully started to moderate.” Porat and Dimon indicated the fourth quarter environment would probably depend on macroeconomic developments, such as progress from European leaders on responding to the region’s debt crisis.
Average daily equity-trading volume on the largest U.S. exchanges is down 11 percent from the third quarter. Dollar volume of high-yield corporate bonds has declined 26 percent from a year earlier, while volume of investment-grade bonds dropped 7.5 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“Despite a rise in equity prices, trading and investment banking activity has remained sluggish so far in the fourth quarter,” Glenn Schorr, an analyst at Nomura Holdings Inc., wrote this week in a note to investors. “With the usually slower holiday season coming, we see little sign that activity will pick up as we close out 2011.” He rates Goldman Sachs, Citigroup (C) and JPMorgan as “buys.”
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.
Spokesmen for the five banks declined to comment or didn’t return requests for comment.
Banks’ trading-revenue decline may be mitigated by the lack of inventory losses that were seen in the third quarter, Trone said. Trone is the top-rated analyst covering JPMorgan this year, according to data compiled by Bloomberg.
The ten largest global investment banks saw combined net losses of about $850 million in their credit-trading units within fixed income in the third quarter, compared with positive revenue of $2.7 billion a year earlier, according to industry consultant Coalition Ltd.
Yields on global corporate bonds relative to similar- maturity Treasuries rose 100 basis points to 263 basis points in the third quarter, Bank of America Merrill Lynch index data show. The average spread has risen 14 basis points this quarter.
Credit trading, along with mortgages, is “very weak,” Staite wrote. Interest rates accounted for almost half of all third-quarter fixed-income trading revenue, according to Coalition data. Staite wrote that may stay the strongest area.
Jefferies Group Inc. (JEF), the New York-based investment bank that’s been expanding its advisory and fixed-income businesses, reported yesterday that trading revenue dropped about 31 percent from a year earlier.
Trading throughout the year was held back by “investors’ reluctance to take risks in transactions in the face of abject political and economic uncertainty,” Jefferies CEO Richard Handler, 50, said during a conference call with investors. “2012 is a new year.”
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