Wall Street’s top five banks have posted their best quarter for trading in a decade after the coronavirus pandemic led to frenzied market conditions and radical interventions from central banks.
JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup posted combined trading revenues of $33.4bn in the second quarter, their highest tally since the $33.7bn they made in the first quarter of 2010. The gains cushioned the blow of more than $20bn of provisions for loan losses on the banks’ income statements.
But executives are already warning of a sharp drop-off. Just hours after announcing his bank’s 80 per cent rise in trading revenues from a year earlier, JPMorgan Chase boss Jamie Dimon suggested analysts could “halve” that haul as a predictor for the rest of the year. Other executives agreed with the thrust of Mr Dimon’s argument: this was a blowout quarter and unlikely to be repeated.
“It was probably as good an environment as you could have,” said Carey Lathrop, co-head of global markets at Citi and a 32-year trading veteran. He described two key factors: clients rapidly adjusting their portfolios to deal with fast-changing economic forecasts, and the huge bond-buying programmes launched by the US Federal Reserve and other central banks — which had also slashed interest rates.
The flurry of activity lifted trading volumes in the earlier part of the quarter, multiplying bankers’ fees as they put through higher numbers of buy and sell orders. Bankers said daily volumes at some trading desks were three to five times normal levels.
Fast-moving prices in the March sell-off had widened the gap between the cost of buying an asset and selling it. “Volatility ticking up led to elevated client activity and wider bid/offer spreads,” Jim Esposito, Goldman’s co-head of global markets, told the Financial Times. “This increased client activity fell to the bottom line.”
Jon Pruzan, chief financial officer at Morgan Stanley, also identified wider bid/ask spreads as a significant contributor to the growth in revenues.
Traders said that the Fed’s promise in March to buy sovereign bonds in unlimited amounts and to buy corporate bonds for the first time, followed by a pledge in early April to buy riskier credit, helped to stabilise the market.
The actions changed investors’ mindset from “‘how far can this go, how negative can it get?’ to ‘what assets should I be buying right now?’” said Troy Rohrbaugh, head of global markets at JPMorgan, which posted market-leading trading revenues of $9.7bn for the quarter.
The result was more investors buying and selling stocks and bonds, helping to offset the effects of shrinking bid/ask spreads, as uncertainty faded. At the same time, fears of recession and a cash crunch prompted big companies to raise record amounts of debt, which generated follow-on trading in secondary markets. One final tailwind was an increase in the value of bonds and derivatives held by the banks, which had been marked down at the end of the first quarter.
Fixed income markets were the best performing in the second quarter, with revenues across the five US banks almost doubling. Executives said the standout segment was rates, which includes sovereign bonds, financing and related derivatives, but noted that trading of commodities, currencies and corporate bonds was also very lively.
Analysts expect that the US banks’ rivals across the Atlantic should get a similar, if smaller, boost in their results. Kian Abouhossein, an analyst at JPMorgan, said European banks would likely post a 40 per cent increase in their fixed-income trading revenues for the second quarter, led by a 69 per cent increase at Barclays and a 45 per cent rise at BNP Paribas. Deutsche Bank is expected to report a smaller rise of about a fifth. On average, European banks make about half the fixed-income trading revenue of their US peers.
With the second half well under way, Wall Street is already seeing trading activity taper. “June was a transition month and now in July volumes are back to somewhere very similar to what we have seen in recent years,” said Hans Mikkelsen, a credit strategist at Bank of America. The volume of daily trading in top-rated bonds has fallen about a third from its peak to $20bn, BofA’s research shows.
At Citi, Mr Lathrop described a “slowdown” in July which he expected to continue into August, contributing to a second-half performance that was similar to that of the past few years.
Amrit Shahani, research director at industry monitor Coalition, said that trading revenues in the third and fourth quarter would probably be at least 20 to 30 per cent lower than the second quarter, across big US and European banks.
Potential sources of volatility remain, including the US presidential election in November, tensions between Beijing and Washington and the surge in Covid-19 cases in the US.
But Mr Rohrbaugh said he “wouldn’t expect anywhere near the same level of volatility that we saw earlier in the year. The markets were reacting to a much higher level of uncertainty then.”
Additional reporting by Stephen Morris in London