JPMorgan Chase (JPM) weighed on financials Monday after the bank warned that the long industrywide slump in trading revenue still is far from over.
That’s bad news for most of the big bank stocks — including JPM, Goldman Sachs (GS), Bank of America (BAC), Morgan Stanley (MS) and Citigroup (C) — which derive a great deal of revenue from trading in bonds.
Lower volumes, especially from fixed income, currencies and commodities (FICC), hurt banks last quarter. Heck, lower client activity in the markets has been weighing on JPMorgan Chase, GS, BAC and C results for many quarters now. FICC is usually a big profit center — Goldman is used to printing money in that business — but now fewer folks are showing up to trade.
Morgan Stanley was the only big bank to report an increase in trading revenue last quarter, but MS focuses on stocks more than bonds. That’s not the case for JPMorgan Chase, GS, BAC or C — and it’s certainly not good news for profitability in the current quarter, so lower your expectations.
JPM warned in a regulatory filing that its fixed-income and equities trading revenue will fall about 20 percent year-over-year when it closes the books on the second quarter. JPMorgan chase blamed “a continued challenging environment and lower client activity levels,” which would sound like a lame excuse if it weren’t hurting all financials with trading operations.
Fixed income trading was slow even before the Federal Reserve pulled back on its bond-buying program. Indeed, FICC has been an albatross for financials. In the last quarter, JPMorgan Chase said profit fell 19% to $5.27 billion, driven by a decline of 21% in fixed-income trading.
JPMorgan Chase Sets Tone for Financials
Continued sluggishness does not bode well for financials in the second quarter. In the case of JPM, a 20% drop in trading revenue would lop a billion dollars off the revenue contribution from FICC. JPM — not to mention financials like GS, BAC, C and even MS — haven’t seen this kind of slowdown since the depths of the financial crisis.
JPMorgan Chase stock fell almost 3% early in the session on the warning, and the selling spread to peers instantly. BAC, C, GS and MS all slumped by more than 1% on the news.
Importantly, however, they didn’t get shellacked. That implies the market is pretty well prepared for another quarter of crummy trading revenue at JPMorgan Chase, GS, BAC, C and MS.
Thank goodness, because all these financials are having a bad year so far.
JPM is off 7% for the year-to-date, while BAC and MS are off 3% and 4%, respectively. Where it really gets ugly is with Goldman Sachs and Citigroup. C stock is down more than 9%, but that’s more because it failed the Fed’s stress test. GS, however, is down 12% so far this year, partly because it’s big trading operation is hurting from lack of activity.
Financials need their big clients to come back to bond trading, but with the Fed pulling out of the market, all these names are coming up against difficult comparisons. Even if volume does perk up, it still could be lower than last year.
Shares in JPM, C, BAC, GS and MS could rebound at some point this year, but more disappointing results sure aren’t going to help.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.