Citigroup Joins JPMorgan in Seeing Trading-Revenue DropDakin Campbell and Michael J. Moore
Citigroup Inc. and JPMorgan Chase & Co. are bracing investors for a fourth straight drop in first-quarter trading, a period of the year when the largest investment banks typically earn the most from that business.
Citigroup finance chief John Gerspach said yesterday his firm expects trading revenue to drop by a “high mid-teens” percentage, less than a week after JPMorgan Chief Executive Officer Jamie Dimon said revenue from equities and fixed income was down about 15 percent. If trading at the nine largest firms slumps that much, it would extend the slide from 2010’s first quarter to 36 percent.
“It sounds like more bloodletting on Wall Street,” said Jeff Davis, a managing director for the financial-institutions group at advisory firm Mercer Capital in Nashville, Tennessee. “What we are seeing is a function of investors being scared of bonds because the math is bad. No one I talk to wants to take a chance adding bonds to the portfolio.”
Clients are trading less as the Federal Reserve slows its monthly asset purchases and leaves bond investors preparing for rising interest rates. An index of global equities tumbled the most in a month yesterday, erasing the year’s gain, as Russia’s growing military presence in Ukraine prompted an emerging-market sell-off.
JPMorgan shares rose 1.1 percent to $56.81 at 9:57 a.m. in New York, leaving them 2.1 percent below where they traded before Dimon’s Feb. 25 remarks. Citigroup climbed 1.5 percent to $48.32, after dropping 2.1 percent yesterday.
Trading results have been hurt by a slowdown in the fixed-income business, which accounts for an average 80 percent of markets revenue at Citigroup, Chief Financial Officer Gerspach, 60, said yesterday at a presentation in Orlando, Florida.
Lower levels of client activity in a similar business pressured JPMorgan’s results, said Dimon, 57. Fixed-income trading revenue for the industry will be stable this year and probably next year, Daniel Pinto, co-head of the investment bank, said at the same event.
Jason Goldberg, an analyst at Barclays Plc, said that until Dimon’s remarks he had estimated first-quarter trading revenue would be 7.5 percent below the same period of 2013. Todd Hagerman, a Sterne Agee & Leach Inc. analyst, called the drop “a rather tough start” to the year.
Jefferies Group LLC, the Wall Street firm owned by Leucadia National Corp., said today that trading revenue for the three months ended Feb. 28 was $450 million. That was 11 percent less than what it reported a year earlier.
Citigroup brought in about $13.1 billion from trading in fixed-income, currencies and commodities markets, known as FICC, last year, and $3.02 billion from equity trading. JPMorgan got $15.5 billion in revenue from FICC and $4.76 billion from equities. Both banks have said they would like to build up their equities-trading units.
The nine largest investment banks -- a group that also includes Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp., Barclays, Deutsche Bank AG, Credit Suisse Group AG and UBS AG -- reported about $38.5 billion of trading revenue in last year’s first quarter, according to data compiled by Bloomberg. A 15 percent drop would leave about $32.7 billion. That compares with $51.5 billion at the start of 2010.
In the past four years, those firms have generated an average 37 percent of their annual trading revenue during the first three months.
Deutsche Bank said in January that 2014 will be challenging after a surge in legal costs and lower debt trading revenue spurred a surprise fourth-quarter loss. Depressed interest rates in Europe and declining demand for banking services are also among the headwinds the bank is confronting, Co-Chief Executive Officer Anshu Jain said on a conference call with analysts.
Fed Chair Janet Yellen has sought to assure investors that the central bank will gradually withdraw monetary stimulus started under her predecessor Ben S. Bernanke. After yields on 10-year Treasuries reached a 29-month high at the start of the year, they have since retreated as Yellen pledged to maintain Bernanke’s tapering policy in “measured steps” and keep borrowing costs low to support the U.S. labor market.
The taper talk “scared the dickens out of corporate treasurers,” Mercer’s Davis said. “If you bought now and rates took another leg up again, you’d be walking into the CEO’s office” to explain yourself.
Investors should be careful as loan funds, inundated with unprecedented cash, enable junk-rated companies to borrow cheaply, said Howard Marks, the chairman of Oaktree Capital Group LLC, the world’s largest distressed-debt fund.
“When things are rollicking and the market is permitting low-quality issuers to issue debt, that’s when you need a lot of caution,” Marks said in a telephone interview. “You have to apply a lot of discernment.”
In fixed-income trading, lenders are battling a changing landscape as higher capital requirements and new rules designed to make derivatives trading more transparent cap returns. Firms including Morgan Stanley, Credit Suisse and UBS have pulled back from some businesses in response.
Citigroup ranked second behind JPMorgan in fixed-income trading revenue last year, according to data compiled by Bloomberg. Goldman Sachs and Morgan Stanley ranked No. 1 and No. 2 in equity trading. All four firms are based in New York.
The size of this year’s drop has not only surprised analysts; it has left some confused about the reasons. After Dimon cited the “weather” last week in relation to his firm’s trading results, at least three analysts attributed the decline to the U.S. winter, which featured above-average snow cover across the Midwest and Northeast in the coldest start to the year since 2011.
“That’s just the weather,” Dimon said in the annual presentation to investors. He was referring to the business climate and didn’t mean to imply that storms caused the slump, a bank spokesman said a day later.