Wall Street Poised to Post Best Finish to Trading Year Since ’09

  • Trading revenue at biggest U.S. banks probably surged
  • Analysts wonder if it’s sustainable or a Trump false dawn

Banks Estimated to Post Biggest 4Q Profit Since ‘09

Wall Street firms are expected to post the biggest fourth-quarter trading haul since the financial crisis as the U.S. election triggered a frenzy of global markets activity from government bonds to currencies.

Fixed-income and stock-trading revenue at the five biggest U.S investment banks rose 20 percent from a year earlier to $17.3 billion, fueled by a 32 percent surge in bond-trading, according to analysts’ estimates compiled by Bloomberg. The rebound probably will be strongest at Morgan Stanley, the group’s smallest bond shop, with revenue projected to climb 82 percent to $1 billion.

The question analysts have for bank executives is whether the fourth quarter heralds a return for bond trading -- traditionally the biggest driver of Wall Street profits -- or a false dawn created by Donald Trump’s surprise victory in the U.S. presidential election.

The election upended expectations for interest rates, economic growth and financial regulation, factors that support higher trading volumes if Trump realizes his economic goals. Investors will need reason to believe further gains are possible, given that the KBW Bank Index climbed 23 percent since the Nov. 8 election.

“We need to hear from management” on how much potential upside there is for profits in trading and other areas including lending, said Fred Cannon, head of research at Keefe, Bruyette & Woods, especially on “the sustainability of trading increases.”

Driven by higher trading results, particularly on rates and currencies desks, banks’ total fourth-quarter profit is expected to rise 17 percent to $20.7 billion. Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. are scheduled to post results on Friday. Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. will report next week.

The election boosted stock-trading volumes as institutional investors snatched up shares of financial firms and smaller companies. Banks are expected to post $6.39 billion in equities-trading revenue, 4 percent more than the previous year, driven by gains at JPMorgan and Citigroup.

The coming year could be the first since 2012 that both trading and dealmaking revenue increases, Barclays Plc analysts led by Jason Goldberg wrote in a note this month. Fixed-income trading will expand as companies reprice debt and big U.S. banks gain market share from European firms. Investment banks’ fee-generating businesses will be boosted as mega-mergers are completed and stock sales pick up following a lull, the analysts predicted.

One note of caution is coming from the banks themselves. Morgan Stanley President Colm Kelleher said he’s seen “over-exuberance” about how well trading desks were doing. While the first quarter is typically the strongest for traders, in 2016 it was unusually weak as uncertainty over global growth roiled markets.

“If you look at underlying flows, yes they’ve picked up, particularly since the election, but the overall fee pool that relates to fixed income and equities is only marginally up on the year,” Kelleher said in a Bloomberg Television interview last month.

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