Volatility's return a boon to U.S. banks' trading revenue
NEW YORK (Reuters) - When Wall Street’s biggest banks report first-quarter earnings in the days ahead, investors should see a welcome resurgence in trading revenue growth thanks to the biggest jump in market volatility since President Donald Trump’s election.
Aggregate trading revenue at Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N), Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) could hit a three-year high and reverse three straight quarters of year-on-year declines, some estimates show.
Volatility roared into global markets in February after a prolonged calm in 2017, roiling stocks, bonds, currencies and commodities, and remained elevated through the end of March.
In some markets, like bonds, the increase was the largest since the 2016 U.S. election, and in others, like stocks, volatility leapt by the most in 2-1/2 years.
(For a graphic on 'Financial market volatility picks up' click reut.rs/2qtVSN1)
Volatility is typically no friend to investors because it is associated with broad price declines, as in the first quarter. But it can be a boon for Wall Street dealers because it begets trading volume and creates opportunity to profit quickly on outsized price swings.
The S&P 500 .SPX moved 1 percent or more on 23 trading days in the first three months of 2018, three times the number registered in all of 2017.
Equity market volumes in early February hit their highest levels since August 2015 and the quarter’s daily average was the highest since the fourth quarter of 2016.
Trading in bonds, currencies and commodities also boomed. The broad surge in activity could translate into a 5 percent to 6 percent boost to trading revenue at the top five U.S. investment banks, analysts said.
That would mark the first year-over-year increase since the first quarter of 2017, when trading revenue at Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and Citigroup rose by 15 percent, according to Sandler O’ Neill analyst Jeffery Harte in Chicago.
“Despite the fact that Q1 2017 was a particularly strong quarter for trading on the heels of the U.S. Presidential election, we do think we’ll see year-over-year growth in trading revenue,” said Barclays’ bank analyst Jason Goldberg.
Overall profit at the big five is expected to rise around 30 percent, with trading contributing alongside other factors such as the 2017 U.S. corporate tax cut and net interest margin growth.
Still, an improvement will be a welcome change after trading revenue for those banks fell by 20 percent in the fourth quarter, 15 percent in the third quarter and 10 percent in the second quarter, according to Sandler O’Neill’s Harte.
Click here for interactive graphic: tmsnrt.rs/2GPI59w
Recent volatility may be particularly reassuring to investors in Goldman Sachs and Morgan Stanley, which derive between 35 percent and 40 percent of their total revenue from trading, according to research from Credit Suisse.
Trading makes up 15 percent to 20 percent of revenue at JPMorgan, Bank of America and Citigroup, according to the Credit Suisse data.
Sandler O’Neill’s Harte estimates a year-over-year increase of 6 percent for the five banks’ total trading revenue to $22.71 billion, up from $14.47 billion in the fourth quarter and $21.33 billion in the first quarter last year.
Equity trading could jump 11 percent in the first quarter from a year earlier for the five banks, Harte said.
Morgan Stanley, JPMorgan, Bank of America and Citigroup should report fixed income, currency and commodities (FICC) trading revenue that is flat to up 5 percent compared with a 24 percent jump in FICC revenue a year ago, according to Harte.
Goldman’s FICC revenue should jump about 30 percent from the year-ago quarter, when it reported a 2 percent drop in total trading revenue, according to Harte’s estimates.
Shares of all but Citigroup have modestly outperformed the wider market so far this year.
The S&P 500 is down 0.75 percent while Goldman is down 0.6 percent; Morgan Stanley is up 1.3 percent; Bank of America is up 1.8 percent; and JPMorgan is up 4.1 percent. Citigroup is down 5.8 percent.
Citigroup and JPMorgan, due to release their earnings on Friday, will be the first of the five to report.
Additional reporting by Caroline Valetkevitch in New York; Editing by Dan Burns and Meredith Mazzilli
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