Trading operations stung banks in fourth quarter but
dovish Fed fuels hope
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[January 17, 2019]
By Sinéad Carew and Kate Duguid
(Reuters) - Big trading operations were a thorn in the side of the top
U.S. banks in the fourth quarter as fears about global growth sent
credit markets into a tailspin, but a "dovish" turn from the Federal
Reserve may mean the drama is over for now.
Citigroup Inc, JPMorgan Chase & Co, Goldman Sachs Group Inc and Bank of
America Corp all reported declines in fourth-quarter revenue from their
key fixed income, commodity and currency trading arms, although overall
results at most were cushioned by improving loan growth and net interest
margins.
The final months of 2018 were dominated by investor worries about
slowing global growth and the U.S.-China trade dispute and were further
aggravated by concerns that the Fed might be pushing interest rates too
high. The resulting volatility in equity, bond and commodity markets
sent many investors to the sidelines, pushing down bond trading volume
and hurting the value of credit market assets sitting on banks' own
books.
"You had a one-two punch of market losses on inventory along with a lot
of bank clients stepping back from market because you couldn't have much
of an opinion given the uncertainty," said Jeffery Harte, bank analyst
at Sandler O'Neill & Partners.
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Credit spreads, the measure of additional compensation investors demand
for owning riskier corporate securities over safer U.S. Treasuries,
widened in the fourth quarter by the most in more than seven years both
for investment-grade and high-yield, or junk, bonds, according to ICE
BofAML index data.
Moreover, corporate bond issuance largely dried up, slicing into
underwriting fees.
As quarterly results spilled out this week, it became clear that it all
added up to a sizable hit for Wall Street's biggest players.
Bank of America said fixed income fees fell 5 percent because of lower
debt underwriting and advisory fees, while its adjusted sales and
trading revenue fell 6 percent, with a 15 percent fall in bond trading.
Goldman Sachs' bond trading revenue slid 18 percent to $822 million, far
from its peak of more than $6 billion.
In both cases, a big surge in equity trading volumes during the quarter
helped offset those losses.
But JPMorgan missed profit estimates for the fourth quarter as its bond
trading revenue slump overpowered strong consumer loan growth.
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The Citigroup Inc (Citi)
logo is seen at the SIBOS banking and financial conference in
Toronto, Ontario, Canada October 19, 2017. Picture taken October 19,
2017. REUTERS/Chris Helgren
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At Citigroup, Chief Financial Officer John Gerspach said for much of the quarter
corporate and investor clients "remained on the sidelines, waiting for some
clearer market conditions." Citi reported a 21 percent fall in revenue in its
markets and securities business for the quarter.
After being slow to address the spasms in financial markets, Fed officials in
recent weeks have said they are mindful of how such moves have tightened
financial conditions. The Fed raised interest rates four times in 2018, but
since the start of this year a chorus of Fed officials, including Chairman
Jerome Powell, have come out to pledge that they will take it slow from here.
That dovish tone has investors in a better mood so far in the first quarter.
The S&P 500 is up more than 11 percent from its Dec. 24 low and junk bonds are
enjoying their strongest start to a year in a decade, according to ICE BofAML's
high-yield index.
The S&P bank sector has risen 17.5 percent since its Dec. 24 low, including a
5.6 percent gain since Citigroup kicked off earnings season on Monday.
Even as "the potential for tape-bombs from trade and political developments
still present challenges, the dovish pivot at the Fed has helped calmed
markets," said Craig Bishop, lead strategist for U.S. fixed income strategies at
RBC Wealth Management. "This has contributed to tamping down fixed income
volatility, so to me it could be just a matter of one bad month/quarter."
But no one is quite ready to dismiss the possibility that the environment could
change quickly again for the worse.
"That could change tomorrow," said Sandler O'Neill's Harte. "That's the trouble
with trading revenues, they're awfully volatile. But at least today the first
quarter is looking a lot better than the fourth."
(Additional reporting by Imani Moise; Editing by Dan Burns and Tom Brown)
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