Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Trading was a bright spot for Wall Street in the first half of the year, picking up the slack as lending and net interest income growth slowed across the industry.
JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley collectively pulled in $60.3bn in equities and debt trading revenues in the first six months of 2024 — 5 per cent higher than the same period last year. That party may now be over. Other parts of the business will need to step up.
Bank bosses this week gave a pretty downbeat outlook. At JPMorgan, third-quarter trading revenue is expected to be flat or to rise 2 per cent year on year — compared to a 10 per cent increase in the second quarter.
Citigroup’s trading unit is on track for a 4 per cent decline. Goldman is predicting a 10 per cent fall. Even Bank of America, which has invested heavily to build out sales and trading, is on course for just low single-digit growth.
But the picture is more complicated. The stock market, which has touched successive records, means equity trading desks should still be going strong. It is fixed income, currency and commodities (FICC) trading that is running out of steam.
True, fixed-income traders are coming off some of their busiest years ever. During the pandemic, the Federal Reserve’s efforts to keep credit flowing led to a flurry of bond underwriting and debt trading. Post Covid, business benefited from providing financing to private equity and hedge fund investors.
Still the timing is not ideal. With the Fed widely expected to kick off a monetary easing cycle with a 25 basis point rate cut this month (with maybe two more cuts before the year ends) net interest income will take a hit. However, lower rates could also spur spending, loan growth and alleviate funding cost pressure.
The good news for big banks is that the revival in deal activity remains robust — particularly in debt and equity underwriting.
Citigroup expects investment banking revenue to be up 20 per cent year on year in the third quarter. JPMorgan is penning in a 15 per cent increase. Investment banking volumes and capital market activity are still well below historical averages, suggesting more upside to come.
Banks are also sitting on record levels of excess capital. Some could find its way to investors in the form of buybacks and dividends now that proposed new capital requirements have been pared back. Trading may have turned. But it is still too early to call time on Wall Street banking stocks.
