Two Major Issues Are Spoiling The Party For Wall Street Bank Earnings This Quarter

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Wall Street's big banks will be reporting third quarter earnings for the rest of this week, and there are two major issues making analysts nervous — Wall Street's mortgage businesses and bank trading revenues in fixed-income.

JP Morgan reported a quarterly loss on Friday, but that was a special case due to the government's legal crackdown on the bank. Citi, reporting tomorrow, Bank of America on Wednesday, Goldman Sachs reporting on Thursday, and Morgan Stanley reporting Friday all have other fish to fry.

First — and we saw issues around this on Friday with JP Morgan and Wells Fargo — rising interest rates are cutting into banks' mortgage origination businesses. Americans simply don't want to refinance at a higher rate, and taking out a new mortgage isn't as attractive as it was before.

At JP Morgan that meant that the pace of new mortgages has slowed dramatically (remember, we're coming off the major lows of the financial crisis), and refinancing fell overall. 

Expect this mortgage issue to be a big problem at Citi and Bank of America.

Analysts are  also worried about trading revenue, specifically when it comes to fixed-income markets. At the end of September, Brad Hintz, an analyst at  Sanford C. Bernstein & Co. wrote that Wall Street would see a “a full-scale rout" in trading revenue.

Other analysts around the Street, like Marty Mosby at Guggenheim Securities, agreed and cut expectations en masse.

This isn't coming out of nowhere, Jefferies and Deutsche Bank both reported horrific numbers in Q3 — by horrific we mean Jefferies' fixed-income trading revenue plunged 88% year over year. 

JP Morgan's fixed-income trading business didn't report a total pounding on Friday, just a slight smack — the business is down 8% from Q3 2012.

Other banks may not be so lucky. Bloomberg reports that based on his analysis of fixed-income trading, Richard Staite, an analyst at Atlantic Equities LLP, cut his forecasted earnings per share at Goldman Sachs and Morgan Stanley by 18% and 25% respectively.

This could get ugly.



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