LDN - Business

Light trading volume seen as black spot in banks' results

[October 11, 2017] By Sinead Carew

(Reuters) - Trading revenue was likely to be a black spot in U.S. banks' third quarter earnings, as volatility remained low, and investors have little hope the fourth quarter will be much better.

U.S. banks' equity trading volume has been hit by record lows in volatility as investors have less reason to trade if stocks are not moving much. At the end of the third quarter, the quarterly average for the CBOE market volatility index <.VIX>, was at its lowest ever.

On top of this, traders said that equity trading had also been dampened by an ongoing rise in popularity of passive investment instruments such as exchange traded funds over active investing.

Trading volume for fixed income, currencies and commodities (FICC) was also hurt by weak volatility in the quarter. Making matters worse, banks face a difficult comparison with the year-ago quarter when investors were busy reacting to the Brexit vote and preparing for the U.S. election.

“August was very slow. We saw some fits and starts from different headlines in September,” said Thomas Roth, head of U.S. Treasury trading at MUFG Securities America in New York.

While S&P banks were still expected to report EPS growth of 6.4 percent and revenue growth of 1 percent, according to Thomson Reuters data, analysts pared their estimates during the quarter as expectations for trading revenue declined.

Revenue estimates were 2.2 percent lower than where they were July 1 while EPS estimates were 1.8 percent lower.

Banks in aggregate will report a 16 percent decline in trading revenue from the year-ago quarter and a 7 percent decline from the second quarter, according to KBW estimates, following a 10 percent year-over year drop in trading revenue for the second-quarter.

The third-quarter decline includes a 25 percent drop in fixed income, currency and commodities trading revenue and flat equity trading revenue, according to KBW.

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People pass the JP Morgan Chase & Co. Corporate headquarters in the Manhattan borough of New York City, May 20, 2015. REUTERS/Mike Segar/File Photo

Executives from JPMorgan Chase & Co <JPM.N>, Bank of America Corp <BAC.N> and Goldman Sachs Group Inc <GS.N> all warned in September about weak trading revenue in what they described as a challenging quarter.

Goldman Sachs <GS.N> was expected to see the biggest drop in trading revenue with a 20 percent overall decline from the year-ago quarter driven by a 40 percent drop in its FICC trading revenue, according to KBW.

JPMorgan <JPM.N> is expected to show an overall drop of 19 percent driven by a 25 percent drop in FICC trading revenue and a 2 percent drop in equity revenue. Citigroup <C.N> will see overall trading revenue tumble 16 percent while Bank of America's <BAC.N> was seen declining 15 percent. Morgan Stanley <MS.N> was expected to fare the best with a 10 percent drop in trading revenue, KBW estimated.

Some of the factors that drove trading declines in the third quarter will still be around in the fourth quarter, according to traders and other market watchers.

"Who knows when volatility will pick up?" said Russell Price, senior economist at Ameriprise Financial in Troy, MI. "Comparisons will be better after the first of the year and we could know more on tax reform so that could help on trading activity," he said.

(Additional reporting by Richard Leong; Editing by Andrew Hay)

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