Wall Street banks set to profit again when Fed withdraws
pandemic stimulus
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[October 18, 2021] By
Matt Scuffham
NEW YORK (Reuters) -Wall Street banks have
been among the biggest beneficiaries of the pandemic-era trading boom,
fueled by the Federal Reserve's massive injection of cash into financial
markets.
With the central bank nearing the time when it will start winding down
its asset purchases, banks are set to profit again as increased
volatility encourages clients to buy and sell more stocks and bonds,
analysts, investors and executives say.
The Fed has been buying up government-backed bonds since March 2020,
adding $4 trillion to its balance sheet, as part of an emergency
response to the COVID-19 pandemic.
The strategy was designed to stabilize financial markets and ensure
companies and other borrowers had sufficient access to capital. It
succeeded but also resulted in unprecedented levels of liquidity,
helping equity and bond traders enjoy their most profitable period since
the 2007-09 financial crisis.
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The top five Wall Street investment banks - JP Morgan Chase & Co,
Goldman Sachs, Bank of America, Morgan Stanley and Citigroup - made an
additional $51 billion in trading revenues last year and in the first
three quarters of 2021, compared with the comparative quarters in the
year prior to COVID, according to company earnings statements.
The trading bonanza, along with a boom in global deal-making, has helped
bank stocks outperform the broader market. The KBW Bank index has risen
by 40% in the year-to-date compared with a 19% advance in the S&P 500.
Now, banks with large trading businesses are expected to profit a second
time as the Fed starts to withdraw the stimulus, prompting investors to
rejig their portfolios again.
"As investors look to position based on that volatility, that creates an
opportunity for us to make markets for them. And obviously that would
lend itself to improved performance," Citigroup Chief Financial Officer
Mark Mason told reporters this week.
Fed Chair Jerome Powell signaled in late September that tapering was
imminent. An official announcement is expected in November and the
central bank has signaled it will look to halt asset purchases
completely by mid-2022 - a timetable seen by some investors as
aggressive.
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A street sign for Wall Street is seen outside of the New York Stock
Exchange (NYSE) in New York City, New York, U.S., June 28, 2021.
REUTERS/Andrew Kelly/File Photo
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Banks have already benefited from enhanced volatility since Powell's comments in
late September, which led to a spike in Treasury yields and a decline in equity
markets. That led to a pick-up in trading volumes at the end of the third
quarter and the start of the fourth quarter, executives say.
"It is possible we will see bouts of volatility associated with the tapering,"
Morgan Stanley Chief Financial Officer Sharon Yeshaya said in an interview
Thursday, adding that she doesn't expect a repeat of 2013's 'taper tantrum.'
At that time, the Fed's decision to put the brakes on a quantitative easing
program sent markets into a frenzy as investors dumped riskier assets in favor
of 'safe havens,' leading to a spike in government bond yields and sharp falls
in equity markets.
Fed officials are confident of avoiding that scenario this time around by giving
markets enough advance warning of their intentions.
"The sweet spot is where you have some volatility but not enough to disrupt the
broader capital markets which have been an important contributor to healthy
trading results over the past year," said JMP Securities analyst Devin Ryan.
Third-quarter results from the biggest U.S. banks this week showed strong
performances in equities trading, boosted by stocks hitting record highs, but a
more subdued showing in bond trading reflecting calm in those markets.
Investors are anticipating activity will ramp up again in the run-up to
tapering, when it eventually begins.
"It will certainly be a positive," said Patrick Kaser at Brandywine Global
Investment Management. "Volatility is a friend to trading businesses."
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(Additional reporting by David Henry; Editing by Andrea Ricci)
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