US banks see 15%-20% slide in Q3 trading

By Steve Slater

LONDON, Sept 13 (IFR) - Investment banks are going through another weak quarter in markets that could see trading revenues fall 15%-20% from a year ago and revive concerns about the long-term health of fixed income and equities desks.

Citigroup and Bank of America Merrill Lynch said fixed income and equity trading revenues in the third quarter were on track to be down about 15% from a year ago. JP Morgan said trading revenues could be down about 20% and Goldman Sachs said the environment for fixed income, currencies and commodities had remained challenging.

Banks are facing a tough comparison compared to last year's quarter, when there was buoyant activity following Britain's vote to leave the European Union and ahead of the US presidential elections.

"We're currently expecting our total fixed income and equity markets revenues to be lower year-over-year, perhaps around 15%," Citigroup chief financial officer John Gerspach said at an industry conference in New York this week.

He cautioned that performance in September could swing that, however. "Volatility has remained somewhat subdued throughout this quarter, especially when you compare it with the third quarter of last year," he said.

JP Morgan chief executive Jamie Dimon said trading would be down, but was less specific. "It would be down. About what, I don't know what's the estimate, around 20% or something like that this quarter.

"Remember, last quarter for us a year ago was a particularly good quarter. And for some of the folks, it was or wasn't."

Paul Donofrio, BAML's finance chief, said at the same conference that low volatility over summer had continued into September and the year-ago comparison is tough.

"We would expect that sales and trading ... would probably be down in the 15% range versus our Q3 last year. And how September ends up, it could be a little more," he said.

Goldman is under most scrutiny after two awful quarters in FICC, particularly in its commodities business. "For FICC, it's a pretty challenging environment for us," Harvey Schwartz, co-chief operating officer, said on Tuesday.

IBD BRIGHTER

Another weak quarter could dash hopes for a recovery in revenues across the industry this year. Banks had a strong first quarter, but that reversed in the second quarter.

FICC revenues at the top 12 banks were up 3% in the first half of this year from the first half of 2016 and equities revenues were up about 1%, according to IFR calculations. Both those gains look like being wiped out in Q3.

A lot of the FICC weakness was due to commodities, where revenues at the big banks in the first half tumbled 41% from a year ago, analysis firm Coalition estimated. Revenues in G10 rates and FX also fell.

Coalition expects FICC revenues in 2017 to be down from 2016.

M&A advisory and equity and debt underwriting remain a brighter spot, however. Revenues in investment banking divisions were up about 18% in the first half from a year ago, led by a rebound in ECM, and that trend may have continued in the third quarter.

Gerspach signalled Citi's IBD Q3 revenues could be up 5%-10% from a year ago. He said Citi was actively involved in a large number of the big deals that have been announced, although revenues will be below the US$1.5bn seen in the second quarter, its best quarter for seven years.

"We don't anticipate repeating that quarter in the third quarter," he said. It would look more like the first quarter, or "maybe a little bit down from that", he said. IBD revenues in the first quarter were US$1.2bn, or 12% higher than Q3 2016.

GUIDANCE NO MORE?

US banks typically provide more guidance on performance before the end of a quarter than European rivals, but that may not continue - at least at JP Morgan.

"We're considering not giving any guidance on trading anymore. I personally think it's a waste of time," Dimon said at the conference.

He said what happened during a quarter wasn't related to how the business was being run and his firm was still producing healthy numbers and making good returns.

BAML's Donofrio said while there were quarterly swings, fee income over the first three quarters had been roughly the same for the last four years, but profitability had gone up "materially" in that time.

"That's because we've been focused on operating leverage, we've been focused on lowering costs and we've improved that profitability with less risk," he said. (Reporting by Steve Slater)