As if the troubles in Europe were not enough, two months of the most turbulent markets in decades are expected to seriously damp trading results for the nation’s largest banks.
In a bellwether for other large financial firms, JPMorgan Chase warned that third-quarter trading revenue was likely to fall about 8 percent from a year ago. Investment banking income is also expected to drop by one-third from a year earlier, as corporations get cold feet about acquisitions as well as stock and debt offerings.
“I think you can safely expect a decline in our markets revenue,” Jes Staley, the head of JPMorgan’s investment bank, said in remarks at the Barclays financial services conference on Tuesday.
There are still 13 trading days left in the third quarter ending Sept. 30, and Wall Street firms will not release their final numbers until the middle of next month. But a sharp fall-off in summer trading seems poised to weigh heavily on the banks’ earnings — and perhaps accelerate another round of layoffs expected in the coming months.
After helping lift Wall Street’s results during the financial crisis, trading revenue is projected to fall for a second straight quarter. On average, it is expected to be down by about 7 percent from a year ago, according to Credit Suisse research. Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are also expected to have weak third-quarter results.
Investors shrugged off the latest bad news as shares of the biggest banks rose slightly on Tuesday in relatively calm trading. But bank stocks have been pummeled recently. The KBW index, a widely cited gauge of the banking sector, has fallen more than 28 percent since January.
Although Wall Street firms can land windfalls making speculative bets with the banks’ own capital, the bulk of their trading revenue comes from transactions made on behalf of clients.
But with the heightened volatility over the summer, many companies and investors remained on the sidelines — causing a significant slowdown in trading activity.
The lackluster trading results come at a bad time for the industry, when profits and revenues have slipped to the levels attained before the housing boom. Many are bracing for a slowdown in lending, as consumers grow nervous about their job prospects and businesses put off expansion plans. Banks still face an endless stream of legal headaches and litigation fees from the foreclosure mess.
In addition, new regulation has ratcheted up compliance costs and caused once-lucrative income streams, like debit card swipe fees and overdraft charges, to vanish. And all that is not counting the impact of the Federal Reserve’s pledge to keep interest rates low for the next two years — a move that will erode lending profit margins in the months ahead.
In anticipation of leaner times ahead, banks are looking to cut costs and streamline their operations. On Monday, Bank of America announced plans to cut about 30,000 jobs across the company, or nearly 10 percent of its work force. Citigroup, Goldman Sachs, Barclays, Credit Suisse and UBS are among the major Wall Street firms that have started laying off employees in the last few months.
JPMorgan’s investment bank is more than halfway through a five-year plan to save about $1.3 billion a year by consolidating its trading operations — a move that will involve shedding as many as 3,000 workers, some of whom will be employed elsewhere in the bank.
But so far, Mr. Staley said the bank does not anticipate a major round of layoffs beyond those previously announced. “We have had a very good first half of the year,” he said at a banking conference in Frankfurt last week. “We will see how this plays out.”
Still, the numbers at JPMorgan may foreshadow more pain ahead. JPMorgan was among the first major banks to sound the alarm bells over souring subprime mortgage loans in early 2007. In 2008, the bank flagged concerns about ballooning losses on its large portfolio of home equity loans ahead of many competitors and has moved quickly to shore up its reserves against legal claims stemming from the mortgage mess.
In his remarks, Mr. Staley said investors could expect equity and fixed income trading revenues to decline about 30 percent from the second quarter, putting them at about $3.85 billion. Investment banking fees are expected to fall to about $1 billion, down from $1.9 billion in the second quarter. He also said that the bank’s private equity business would face a “moderate loss” of about $100 million and that its asset management business would see trading-related declines.
Other banks may see a similar fall-off in trading. Citigroup, which has a giant fixed-income business, could see core trading revenue drop 47 percent from a year ago, according to Credit Suisse research. Overall trading revenue at Morgan Stanley is expected to fall about 1 percent from a year earlier, while revenue at Bank of America is expected to rise about 11 percent. Both banks had relatively weak third-quarter results in 2010.
Meanwhile, Goldman Sachs’s trading income is expected to fall about 7 percent from a year ago, according to Credit Suisse. But that may not represent the full extent of the declines it can expect.
Richard Staite, an analyst at Atlantic Equities, wrote in a recent report that the bank could face more than $3.2 billion in losses tied to its investment and lending businesses, which include private equity and other investments made with the bank’s own capital. That is because it must adjust its accounting to reflect the market’s recent round of wild swings.
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