Big five US investment banks hurt by China and oil

Charts: US banks data

Wall Street banks are poised to unveil another batch of lacklustre profits after the run-up to the Federal Reserve’s historic interest rate rise failed to boost their crucial trading businesses.

Results to be presented over the next week and a half are expected to show the big five US investment banks generated even less revenue from trading in the last three months of the year than in the troublesome third quarter.

The latest set of weak figures underlines how structural challenges — such as the Volcker ban on proprietary trading and a shift toward electronic platforms — are weighing on investment banks.

In total, the big five — JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup — produced $8bn of revenues from their core debt sales and trading businesses in the quarter, Credit Suisse estimates.
This represents a mere 2 per cent improvement from an especially tough period a year ago, and a 15 per cent drop from the previous quarter.

The end of the year is a traditionally quieter time as investors wind down ahead of the festive break.

Yet Brennan Hawken, analyst at UBS, said the fourth quarter was weaker than normal.

Nervous investors sat on their hands as the persistently weak oil price combined with mounting fears over China, he said.

Jitters had continued into the new year, Mr Hawken added, exacerbated by political tensions in Saudi Arabia and North Korea. “This type of environment is really, really bad,” he said.

The corporate deal-making boom helped relieve some of the pressure. But M&A fees were equivalent to just one-tenth of those from sales and trading at nine top investment banks over the first nine months of the year.

JPMorgan is expected to set the tone when it kicks off the results season this week with a forecast 16 per cent quarter-on-quarter decline at its fixed-income, currencies and commodities operation, according to Deutsche Bank. Together, analysts have forecast a 5 per cent drop in adjusted net income across the bank from a year ago to $4.86bn.

Several executives, including Bank of America chief Brian Moynihan, last month issued downbeat predictions of fourth-quarter trading revenue.

The Fed’s rate increase came just two weeks before the end of the quarter, limiting its positive impact on the financial results.
“Going in to the fourth quarter many investors felt there would have been a pick up from the third, largely because of expectation the Fed was going to increase rates,” said Gerard Cassidy, analyst at RBC Capital Markets. “These hopes were dashed.”

Morgan Stanley set out plans last month to cut 470 employees from its FICC unit — equivalent to about one-quarter of its headcount.
Banks’ retail arms are poised to benefit from the Fed’s interest rate rise. Lenders have already passed on higher rates to borrowers but have so far mostly held off from offering better terms to depositors.

Goldman Sachs has calculated that banks could boost net profits by about 2 per cent this year, assuming a constant cost of deposits and two further rate increases from the Fed.
Ken Usdin, analyst at Jefferies, said the big question for 2016 was whether losses from energy and other “over-leveraged” sectors were fully offset by gains from net interest margins.

“If not, there will be even greater challenges for banks,” he said.

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