Banks Set to Report Lower Earnings as Debt Trading Slumps

Surging stocks, booming initial public offerings and rising employment all pointed to a feast of first-quarter bank profits. Debt markets crashed the party.

Fixed-income trading slid 15 percent in the first three months of 2014, analysts estimate, as the Federal Reserve slowed its bond purchases. Combine that with a drop in mortgage revenue and a $9.5 billion legal settlement, and profit for the nation’s five biggest banks probably fell 14 percent to $16.5 billion from a year earlier. Only sixth-ranked Morgan Stanley, which relies less on those businesses, is seen bucking the trend.

“There’s been a lot less fixed-income activity than we typically see in the first quarter,” David Konrad, Macquarie Group Ltd.’s head of U.S. bank research, said in a telephone interview. “The environment is more challenging when rates are increasing and liquidity is being pulled from the market and regulation’s coming in.”

The slump in bond trading, a business that fueled Wall Street’s rebound after the credit crisis and generates more revenue than equities at most big banks, may erode earnings at firms such as Goldman Sachs Group Inc. Profit there probably fell 23 percent to $1.73 billion. Morgan Stanley, owner of the world’s biggest brokerage, may be alone among the largest U.S. banks in posting higher earnings as it relies more on equities. Its profit surged 23 percent to $1.19 billion, according to analysts’ estimates compiled by Bloomberg.

Pets IPO

Companies including Pets at Home Group Plc, a U.K. retailer of animal-care products, are taking advantage of investor demand for new stocks. They raised $44.2 billion in IPOs in the first quarter, up 126 percent from the same period a year earlier.

Morgan Stanley was the top IPO adviser among U.S. banks, followed by Goldman Sachs and JPMorgan Chase & Co., according to data compiled by Bloomberg. The firms are based in New York.

The Standard & Poor’s 500 Index rose 1.3 percent in the first quarter, extending last year’s 30 percent gain, and closed at a record high April 2. It has since retreated 2.4 percent as traders dump shares of technology firms amid concern that valuations of the market’s biggest winners advanced too far.

JPMorgan Chief Executive Officer Jamie Dimon, 58, whose bank kicks off first-quarter earnings season April 11, told investors in February that trading revenue had fallen about 15 percent since the start of the year. Citigroup Inc. Chief Financial Officer John Gerspach, 60, said last month he expected a drop in the “high mid-teens.”

‘New Paradigm’

Clients are trading less as the Fed tapers asset purchases and leaves bond investors anticipating rising interest rates, according to analysts including Chris Mutascio, at Stifel Financial Corp.’s KBW unit.

“People aren’t making their bets or putting on hedges until tapering ends because they feel we have a ways to go before they have to act,” said Mutascio. “Is this a new paradigm? Are we going lower from here? We just don’t know the answer.”

Konrad estimates that fixed-income trading may remain below last year’s level through 2016.

JPMorgan, the biggest U.S. bank, may report that net income tumbled 17 percent to $5.4 billion, according to the average estimate of analysts surveyed by Bloomberg. San Francisco-based Wells Fargo & Co., which also reports earnings April 11 and is the largest U.S. home lender, probably will post profit of $5.1 billion, down about 1 percent from a year earlier.

BofA Settlement

Bank of America Corp. may say net income dropped 54 percent to about $682 million, as the Charlotte, North Carolina-based lender’s settlement last month over claims tied to faulty mortgages cut pretax profit by $3.7 billion. Analysts predict New York-based Citigroup’s net income will slide 4.5 percent to $3.64 billion.

Analysts’ estimates of net income at the six firms differed from reported figures by an average of 14 percent during the past four quarters, with banks beating projections about two-thirds of the time, data compiled by Bloomberg show.

More important than the quarter’s numbers is whether higher short-term interest rates arrive in time, Mutascio said. Investors are plowing into bank stocks as they wager that will happen sooner than later, boosting lending profit margins.

Shares of Wells Fargo climbed 7.2 percent this year on top of last year’s 33 percent gain. Bank of America, the nation’s second-largest bank, is up 5.2 percent in 2014 after surging 34 percent in the previous year.

“At some point, you’ve got to get real revenue growth,” Mutascio said. “Or this doesn’t play out well.”

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