Investors might hate these volatile markets but they’ve been great for big bank earnings. Just look at Morgan Stanley (MS), which just ended the big bank earnings season in fine fashion as quarterly profit nearly doubled on a huge rebound in trading activity.
With the exception of Wells Fargo (WFC), which doesn’t much rely on such activities, trading revenues reversed a long trend of weighing on results to actually boost bottom lines at JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Goldman Sachs (GS) and Morgan Stanley.
Sleepy markets — especially in the lucrative worlds of fixed income, currencies and commodities — had been hurting results for the better part of a year before springing back to life last month. Some better U.S. economic data, a new stimulus plan for the eurozone, Scotland’s independence vote and Bill Gross quitting Pimco helped end the market doldrums fast.
And there’s no doubt the banks need the help — even banks like Morgan Stanley, which is relying much more on wealth management than investment banking. As much as wealth management has been performing well for MS, trading and underwriting initial public offerings were responsible for the surge in profits.
Indeed, although revenue from the wealth management business rose 9% to $3.8 billion, it still accounted for less than 43% of the total top line. More than half of Morgan Stanley’s revenue in the quarter came from trading and investment banking.
Big Bank Earnings Stand on Bonds
Bustling markets for bonds, currencies and commodities meant even more for Goldman Sachs, where trading and investment banking remain the firm’s bread and butter. Goldman this season saw its revenue from trading in fixed income, currencies and commodities jump 53%. That was the first time the trading desks posted an increase in revenue in a year, and it propelled GS to a 43% gain in quarterly profits.
In addition to the return of trading and investment banking, another key to big bank earnings season was that the banks still need the trading desks to perform — even the ones striving to depend on them less. There’s just too much weakness everywhere else.
Profitability has long been pinched by historically low interest rates, something that won’t change until some time next year at the earliest. At the same time, as JPMorgan and Wells Fargo can attest, mortgage rates have risen just enough above their lows to greatly curtail origination and refinance activity.
Meanwhile, the boring business of traditional banking remains sluggish, as the slow-growth economy still hasn’t stoked demand for loans.
If nothing else, third-quarter big bank earnings proved that trading is not in a secular decline, and is certainly not dead. The bad news from the quarter is that it’s still tough to grow revenue and profits doing pretty much anything else.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.