Banks Offer Hope for Trading Turnaround After Six-Month Slump

(Bloomberg) -- U.S. banks think a Wall Street revival is coming.

Executives cited a good start to April and the expectation of several large initial public offerings in coming months to offer hope after a rough start to 2019 for their capital-markets businesses. The five largest Wall Street firms’ trading and investment banking revenue both fell in back-to-back quarters, the first time that’s happened in more than six years.

"After a slow start, momentum and confidence picked up," Morgan Stanley Chief Financial Officer Jon Pruzan told investors Wednesday. “Markets in the second quarter have been constructive; pipelines are healthy in investment banking.”

The group -- JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley -- lamented that their investment banking units, particularly in equity underwriting, were hampered in the first quarter by a weeks-long government shutdown that delayed several initial public offerings.

Banks Offer Hope for Trading Turnaround After Six-Month Slump

In trading, bank clients haven’t found a happy medium with the markets in recent months. The fourth quarter was marred by a volatile December as stocks plunged. Bank executives said the start of 2019 featured markets that were perhaps too calm, with investors sitting on the sidelines as they waited on more developments in Brexit and the U.S.-China trade war.

“We’re not necessarily alone in this,” Citigroup Inc. Chief Executive Officer Michael Corbat told investors at the firm’s annual shareholder meeting this week. “We have a big, of-scale markets business. And, as we know, the markets have been up and down. But we’ve continued to take share. The business has been profitable.”

Banks Offer Hope for Trading Turnaround After Six-Month Slump

The recent quarters continue a longer-term trend that’s troubling to bank shareholders. A shift to passive investing, struggles among hedge funds and moves to cheaper electronic trading have all weighed on the banks’ securities businesses. Trading revenue at the 12 largest global investment banks has fallen in five of the past six years, according to data from Coalition Development Ltd.

But the banks sound optimistic for the quarter ahead. Citigroup CFO Mark Mason said his firm doesn’t expect the seasonal decline in revenue between the first and second quarters to be as big as usual. JPMorgan called its investment banking pipeline "robust and active," especially in North America, its biggest market for mergers and acquisitions.

“Resilient macro fundamentals and rising asset prices spurred client engagement later in the quarter,” said Goldman Sachs CEO David Solomon, noting the firm’s institutional clients were less cautious in March. “We continue to hear a strong desire to execute strategic transactions and access the capital markets, while the economy is growing, market prices are favorable and financing markets are open.”

Here are other key takeaways from the largest U.S. banks’ results:

Consumer Strength

As the Wall Street side of the biggest banks struggle, they’ve leaned on their massive retail-banking businesses. Pretax profit from consumer units jumped more than 15 percent at Bank of America, JPMorgan and Wells Fargo & Co. The banks are benefiting from climbing interest income following the Federal Reserve’s four interest-rate increases last year.

Banks Offer Hope for Trading Turnaround After Six-Month Slump

Still, analysts see two threats to the current run: a gentle plateauing of revenue growth as the Fed pauses, and a sharper increase in loan losses if the credit cycle turns. Wells Fargo and Bank of America forecast worse-than-expected growth in interest income for the rest of the year after the Fed’s decision, and three of the four largest banks increased provisions for bad consumer loans.

At Bank of America, for instance, “net interest income generation has been stunted by the presumed end of the Fed hike cycle,” said Ken Usdin, a Jefferies Financial Group Inc. analyst, in a note that downgraded the lender. More loan growth will be “required to help net interest income hold its ground.”

Deposit Costs

The banks are also facing rising deposit costs amid increased competition from upstart online banks, which can offer higher rates for savings accounts and certificates of deposit. Overall deposit growth for the three biggest U.S. banks -- JPMorgan, Bank of America and Wells Fargo -- slowed to its lowest level in at least 10 years as non-interest-bearing deposits declined at all three firms.

Banks Offer Hope for Trading Turnaround After Six-Month Slump

Still, the biggest bank said the trend isn’t coming as a surprise.

“We’re seeing deposit growth slow exactly in line with our expectations,” JPMorgan CFO Marianne Lake said during a conference call with analysts on Friday, noting that most of the slowdown is related to consumers spending more. “We do have a decent portion of our branches that are still in their maturation phase and so we’re definitely seeing some growth in deposits there.”

©2019 Bloomberg L.P.