Wall Street Is About to Answer the Good/Bad Volatility Question
Wall Street bank CEOs prep for questions on looming trade war, buybacks.
(Bloomberg) -- Careful what you wish for.
After bemoaning quiet markets that crimped trading revenue throughout most of 2017, banks celebrated volatility spikes in late January and February that brought life back to the equities, foreign-exchange, Treasury and commodity markets. But not all volatility is created equal. Big movements in asset prices sometimes spook clients enough that they decide to simply wait out the fluctuations.
“Several banks mentioned that volatility spikes are negative for revenues, as it hurts conviction in the short term,” John Heagerty, an analyst at Atlantic Equities LLP, said in a note to clients. “Clients shy away from trading during extreme swings.”
Which trend dominated the quarter will start becoming clear on Friday, when JPMorgan Chase & Co. and Citigroup Inc. report results for the first three months of the year. Trading revenues at the five largest Wall Street banks -- a group that also includes Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley -- are expected to climb 5.1 percent to $22.6 billion, according to analyst estimates compiled by Bloomberg. Goldman Sachs is poised to post the biggest gains, the estimates show, followed by Morgan Stanley and JPMorgan.
Here’s a look at other big trends in play when banks begin reporting earnings:
Trade War
Tariff announcements by the U.S. and China this month sparked fear among investors that a trade dispute could derail the global economic expansion. Bank executives might get quizzed about implications for the U.S. economy and what they’re hearing from corporate clients, with implications for commercial-lending businesses.
Deposit Gathering
Deposit growth slowed to its lowest level since 2011 in the first quarter, according to Federal Reserve data. So far, banks have been able to pass interest rate increases on to borrowers without paying more for the deposits they use to fund the loans. Many analysts expect that trend to come to an end soon: A report by S&P Global Market Intelligence predicted lenders will double the share of Fed rate hikes they pass along to depositors by year-end.
Another wild card in that debate are online-only banks, including Goldman Sachs’s Marcus, which continue to boost rates on their savings products to quickly gather deposits that fund lending businesses.
Credit Costs
Investors’ concern about record consumer debt levels is prompting assurances from bank executives that, with the economy growing and unemployment low, most customers are still paying their bills on time. Still, provisions for souring loans at the five largest commercial banks in the U.S. are expected to climb 3.7 percent to $5.5 billion in the first quarter compared with the prior three month period, according to estimates compiled by Bloomberg. Investors will want to know if that growth means credit quality is becoming a problem again for the biggest U.S. banks.
CCAR Plans
This month was the deadline for banks to submit their plans for returning capital to shareholders -- the Fed’s Comprehensive Capital Analysis and Review, also known as CCAR. While regulators won’t weigh in on those proposals until June, investors are anxious to see how banks will divvy up extra capital generated by the Trump administration’s tax overhaul.
--With assistance from Laura J. Keller Katherine Chiglinsky and Felice Maranz
To contact the reporter on this story: Jenny Surane in New York at jsurane4@bloomberg.net.
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Dan Reichl
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