Wall Street Deal Surge Cushions First-Half Trading SlumpMichael J. Moore and Hugh Son
For Wall Street’s biggest banks, the calm markets that are sapping trading revenue are proving to be a boon for dealmaking and stock underwriting, helping to limit profit declines so far this year.
Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. saw their combined revenue from investment banking rise 6.7 percent to $9.17 billion in the first half of 2014, led by gains in equity underwriting and advising on mergers. By contrast, revenue from trading, while beating analysts’ estimates, slid 14 percent to $26.4 billion, the worst start to a year since the 2008 financial crisis.
While bank executives have bemoaned how low volatility in equity and debt markets has crimped trading, that climate has encouraged companies to issue stock and bonds at a pace rarely seen. Banks are poised to reap more fees from deals including Alibaba Group Holding Ltd.’s planned initial public offering, which could be the largest in U.S. history.
“We’re in a period of calm, which has been negative for the trading side because there hasn’t been much activity, but has been a pretty positive backdrop for deals activity, which has been helping the investment-banking side of the house,” said Shannon Stemm, an analyst at Edward Jones & Co.
The three banks’ revenue from underwriting equity offerings jumped 23 percent in the first half to the highest since the financial crisis as global deals volume topped $400 billion for the first time since 2007, data compiled by Bloomberg show. Advisory revenue was the most in three years, while debt underwriting was the largest piece at $4.32 billion as U.S. bond issuance was the highest since 2009.
The gains haven’t been enough to make up for the decline of fixed-income trading revenue, which has dropped amid lower volumes, increased regulation and higher capital requirements. While first-half investment-banking revenue rose $2.44 billion from the same period in 2010, bond trading tumbled $7 billion.
“Low volumes make it difficult for market-makers to profit from flow trading despite narrowing credit spreads and declining yields,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. “Banking, on the other hand, was quite strong.”
The reliance on trading had weighed on shares of the three New York-based banks. Goldman Sachs, JPMorgan are Citigroup shares were all down for the year through yesterday, compared with a 4.4 percent advance for the 84-company Standard & Poor’s 500 Financials Index.
JPMorgan climbed the most in eight months today and erased its deficit for the year, surging 4 percent to $58.52 at 11:31 a.m. in New York, after earnings beat analysts’ estimates. Goldman Sachs, which had a surprise profit increase, advanced 0.6 percent and Citigroup rose 1.4 percent.
Bank of America Corp., the second-largest U.S. lender, posts results before markets open tomorrow and Morgan Stanley, owner of the world’s largest brokerage, reports a day later.
The trends in both banking and trading revenue may continue in the second half. The value of announced mergers and acquisitions last quarter soared to the highest since 2007, meaning banks are likely to have increases in advisory revenue as those deals are completed later this year, Hintz said.
In addition to Alibaba’s planned IPO, bankers are preparing for a public offering of shares in General Electric Co.’s consumer-lending unit as the company weighs the disposal of more than $4 billion of assets. Reynolds American Inc. said today it agreed to buy rival Lorillard Inc. for about $25 billion excluding debt. TRW Automotive Holdings Corp., which has a market value of more than $11 billion, received a preliminary takeover approach from ZF Friedrichshafen AG.
While trading activity briefly picked up in June, particularly among hedge funds, that increase didn’t carry over into July, JPMorgan Chief Financial Officer Marianne Lake said today in a conference call with reporters.
“Our general operating assumption is that the next two quarters will continue to have low activity year-over-year,” JPMorgan Chief Executive Officer Jamie Dimon said on the call. “That could change on a dime, as you know, but that’s just how we’re going to run the business.”
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