JPMorgan, BofA Trading Revenue on Pace to Drop at Least 10%By and
Banks’ forecasts drive Dow Jones Industrial Average down
Fixed-income trading is the culprit as rebound stalls
Bank shares slid after the revenue updates and led the Dow Jones Industrial Average lower. Markets revenue at JPMorgan was down about 15 percent in April and May from a year earlier, driven by a slump in fixed income, Chief Financial Officer Marianne Lake said Wednesday at an investor conference in New York. At Bank of America, revenue from the business will be 10 percent to 12 percent lower, though first-half results should be stronger, Chief Executive Officer Brian Moynihan said at a separate event.
A top Goldman Sachs Group Inc. executive agreed that clients’ trading remains “subdued,” while, on Thursday in Beijing, Morgan Stanley CEO James Gorman indicated his firm is seeing a similar trend.
Analysts at JPMorgan warned this month that revenue at the world’s biggest investment banks is likely to drop in the second quarter because of the decline in fixed income. The U.K.’s exit from the European Union and Donald Trump’s surprise election win had been fueling wagers on corporate bonds and the direction of interest rates over the past year, boosting Wall Street trading results. Those types of stimulants have been more scarce in recent months.
“There haven’t been that many idiosyncratic events, and we need a few more of them,” Lake said. “As a sweeping generalization, low rates, a more cautious outlook on rates, and low volatility have led to low client flows and a generally quiet, subdued and challenging trading environment.”
In rates trading, clients are cautious because of conflicting signs from unemployment and inflation data, Lake said. In corporate bonds, “people have cash but no conviction” as spreads are tight, she said. Equities, corporate derivatives and the prime brokerage were sources of strength in the quarter, she said.
“Client activities, which were more subdued in the first quarter, have in these first two months, continued in a comparable fashion in the second quarter,” David Solomon, Goldman Sachs’s co-president, said at the same conference, declining to project the impact on the firm’s revenue.
Shares of Goldman Sachs fell 3.3 percent to a six-month low of $211.26 in New York on Wednesday, while JPMorgan slid 2.1 percent to $82.15. The pair were the day’s worst performers in the Dow. Bank of America, which isn’t in the index, dropped 2.2 percent to $22.41.
At JPMorgan, the last three quarters of 2016 generated record trading revenue, so the comparisons this year are harder for traders to live up to, Lake said.
“If I look to June, I don’t see any particular reason for that to change,” Lake said. “But anything can happen in a month.”
Speaking to Bloomberg Television in Beijing on Thursday, Morgan Stanley’s Gorman said the estimates from JPMorgan and Bank of America reflect the reality in the present trading environment. “I don’t think we’re very different,” he said. “We all have similar clients, if not the same clients.”
“There is enormous uncertainty which typically would breed tremendous volatility and it’s not,” Gorman said. “It’s this very passive perspective that investors have and I think the downside risk at this point is outweighing the upside risk.”
When it comes to mergers and acquisitions, uncertainties over European elections and U.S. tax reform have led corporate executives to be cautious, Solomon said. That’s despite steady growth and a competitive environment that encourages CEOs to act. As a result, he expects a “reasonable pace” for deals, and said the environment has felt a little better in the past month or two than it did earlier in the year.
Separately, analysts also asked about expense discipline. Goldman Sachs Chief Financial Officer Marty Chavez, speaking at the same event as Solomon, told investors that when the firm’s revenue does climb, compensation will rise at a slower rate.
Bank of America will take a charge of about $300 million to speed up data-center consolidation, and will report $125 million in severance, about double what’s typical, Moynihan said. The expenses are part of the firm’s goal of cutting total annual costs to $53 billion by the end of 2018.
“We’re trying to accelerate opportunities, and so this quarter we’ll do a couple things to push some stuff through and really position us to make that $53 billion without a problem,” he said.