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Slump in Trading Activities to Dent Banks' Q2 Revenue Growth

Swayta Shah

Top banking executives continue to signal a gloomy trading picture. At an industry conference on Tuesday in New York, they hinted at dismal trading performance in the second quarter. Banks expect reduced client activity to hurt trading and investment banking revenues.

Weak Trading Performance in Q2

Top executives from Citigroup C and Morgan Stanley MS joined JPMorgan JPM and Bank of America BAC in projecting a decline in trading revenues during the April-June period. Several uncertainties, including the U.S.-China trade war concerns, potential rate cut by the Federal Reserve and other geopolitical matters seem to have kept clients away from the markets.

Mark Mason, Citigroup’s chief financial officer, stated that fixed-income and equities trading revenues will likely fall in the “mid-single-digit range” on a year-over-year basis. Further, investment banking fees are expected to decline in the mid-teens range, while at the same time Mason said, performance will “likely better than what we are seeing in the industry overall on the investment banking side.”

Notably, the company’s institutional cash management and retail banking businesses will likely continue to witness growth.

At Morgan Stanley, trading revenues are projected not to reach first-quarter 2019 levels, following a tough start to June. At the same conference, CEO James Gorman noted, “The last two weeks have been quite hard. Up until then, it was solid. We’re not going to have a bad quarter in the securities business, but you’ve got to be realistic with the environment.”

Gorman further stated that trading in the second quarter has been “challenging”, while M&As have been “lumpy.” Despite the slump in trading activities, the company expects to surpass $4 billion in trading revenues in the quarter.

Furthermore, in an interview to CNBC, Goldman Sachs GS CEO mentioned that the quarter has been “up and down”, while refraining from providing any outlook on the company’s trading revenues.

Previously, in late May, JPMorgan CEO Jamie Dimon had warned of a decline in trading revenues. The company witnessed a 4-5% fall in trading revenues during the first two months of the second quarter (excluding a gain), while Dimon noted that “the next month could dramatically change that.” Likewise, Bank of America CEO Brian Moynihan had commented that trading revenues will likely slip around 8% sequentially and 10% year over year.

Our Take

With trading revenues constituting a significant portion of total revenues for these banks, overall performance will likely get hampered. In addition, inversion of the yield curve and dismal job report has put pressure on the Fed to cut interest rates.

As banks generate a major part of revenues from steepening of the yield curve, this is will likely have an adverse impact on their net interest income. Also, these financial firms are undertaking measures to digitalize operations, which will lead to a rise in technology costs.

Shares of Citigroup, Goldman, BofA, JPMorgan and Morgan Stanley have rallied 30.4%, 16.6%, 14.6%, 13.4% and 10.2% so far this year.

Year-to-Date Price Performance


Among the above-mentioned stocks, Morgan Stanley, JPMorgan and Citigroup currently carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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