Washington: US banks reported their worst start to the year in fixed-income trading since the financial crisis, raising new questions about whether Wall Street’s profit engine can ever roar back to life.
Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley reported $15.1 billion in fixed-income trading between them in this week’s earnings season. That is the weakest first quarter since 2008 when most banks racked up huge losses on their bond portfolios.
It is barely more than half the level that the five banks made in the Federal Reserve-fuelled bumper first quarter of 2009, when the central bank’s efforts to rescue the financial system drove up asset prices and allowed the five banks to record $25 billion of profits.
It is also worse than 2007, at a time when the five banks faced more competition before the demise of Lehman Brothers and the acquisitions of Bear Stearns and Merrill Lynch. In the first quarter of that year they made $15.7 billion.
Since then new regulations, including the Basel III capital rules that make trading riskier products less profitable and the Volcker rule that bans banks from trading for their own accounts, have curbed risk-taking.
At the same time, the banks’ clients have shown muted appetite to trade in uncertain markets.
Fixed income, where banks trade derivatives, interest rates, bonds, commodities and currencies, is still a hugely significant part of the banks, representing more than 17 per cent of their revenues – even though three of the five banks also have large consumer operations. But it has been steadily declining after surpassing 28 per cent in 2009.
The weak results in the US come as Barclays and Deutsche Bank — two heavyweights in the business — prepare to report their first-quarter results, with some analysts predicting an even worse result there.
The top four US banks are hoping to pick up share from European rivals. “I am a believer that the European firms are going to continue to have to hunger march,” said Guy Moszkowski, analyst at Autonomous Research. “Either they are undercapitalised, which is certainly the case for Deutsche, or they are facing regulatory pressure, whether from the UK or Swiss banking authorities, to minimise their risk participation.”
Brad Hintz, analyst at AllianceBernstein, said: “I think Goldman makes a good case that at some point in the distant future we will reach the nirvana of repriced markets [because competitors shrink their businesses]. I’m not sure that we’re there yet.”
Moszkowski added that “mix really matters”, with banks that were stronger in commodities and credit, such as Goldman and Morgan Stanley, faring less badly than universal banks such as JPMorgan and Citi.
Gerard Cassidy, bank analyst at RBC Capital Markets, said: “The bigger picture everyone is interested in with FICC trading, the 800-pound gorilla, is: are these lower levels the new levels or is there a more cyclical component?”
Banks can hope that investors rediscover a trading appetite this year but they cannot hope to have digested all the regulations that are hampering their businesses. For example, the full force of new rules pushing derivatives trades towards electronic platforms — potentially weakening bank margins — have not yet been felt. JPMorgan has said those rules alone could hit revenues by $1 billion. “If that’s the number,” said Moszkowski, “it’s still out there.”