The warming up of the US stockmarket for a big downturn in bank profits for the three months to March 31 continues.
Last week we told you about how Citigroup and JP Morgan has already warned of sharp falls in trading revenues – the lifeblood for these big banks – in the March quarter, which has in the past been the strongest quarter for revenues for the sector.
The falls were put in the mid to high teens (i.e. down by 15% perhaps 18% or 19%), now media reports are warning some banks could see falls as high as 25%. If that’s the case, some of these banks could report first half operational losses before any one-offs such as fines, penalties and impairments.
The falls are concentrated in the banks’ fixed income businesses and have led some bank analysts to warn of the rising possibility of more job losses to come among the big banks – Morgan Stanley, JPMorgan Chase, Bank of America, Wells Fargo, Barclays, Societie Generale, Goldman Sachs, Credit Suisse, UBS, Deutsche Bank and others.
These problems don’t seem to be having an impact on Macquarie Group (MQG), which operates in many of these markets and against many of these banks.
The shares fell under $56 yesterday, but are up from less than $44 last September, and $34 a year ago.
Nor are they having much of an impact on the share prices of some of those most impacted by the fall off in revenues.
Goldman Sachs shares are trading around $US170, where they were six months ago – after peaking at just over $US180.
But JPMorgan shares are trading around $US57 a share, after peaking at $US60 last month and hitting a low of $US50 last September.
More doubt about the earnings of US banks, but share prices solid
The Financial Times reported yesterday that according to estimates from Morgan Stanley and Credit Suisse, the top 10 banks will report $US24.8 billion of revenue from their fixed income businesses, which include bonds, currencies and commodities.
The FT said that’s more than 40% under the level in the first quarter of 2009, when the current market rebound started (and Wall Street is up around 178%, but Australia only by just over 70%).
The reasons for the fall are many – lower volumes, falling prices for key commodities, including copper (and oil up to three weeks ago, although it slid back under $US100 a barrel for US crude yesterday). Gold has risen in a start of year boomlet, but the interest hasn’t been great.
Some of these big banks, such as Deutsche and JPMorgan, are cutting back or quitting commodities, or curtailing dealings in some, such as gold because of a combination of new regulations and weak trading volumes and official pressure to do so.
Why this is important for investors outside the US is the importance of the big banks in generating and maintaining investor confidence. If these banks see a big slide in earnings, it will raise concerns about the sustainability of earnings from other companies for the first quarter – especially given the dramatic impact the severe winter has had on retailing, manufacturing (cars), home building and house sales.
Investors have been wondering how long the long US profit and share price boom will continue. January’s falls were partly driven by those concerns.
A series of very weak results from the banks and some other leading companies could see those fears realised and the market correct (by falling 10% or more).
Sharemarkets generally had a weak January, a rebound in February and have drifted or weakened so far this month, especially as doubts have arisen about the strength of China’s economy and the Ukraine situation.
Interest rates have drifted lower as the intense US winter has confused the economic picture, and while Europe and Japan continue to see reasonable growth, the trading volumes are not following suit.
The high speed trading companies are also under pressure because of falling volumes and less trading – that’s due to the rising influence of tracker funds and ETFs which mimic the movement in the Standard & Poor’s 500 or other major indices, or in indexes of commodities or bonds, rather than trying to actively manage money day to day.
On top of this there are new regulations in the US that limit the amount of speculation a bank can undertake in all markets.
The FT reported "Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008.
"The weakness is expected to be even more severe among European banks such as Deutsche Bank and Credit Suisse, which are looking to meet new capital requirements by shrinking their balance sheets. “Anecdotally it seems Europeans are losing most share in the US itself and so are losing global diversification,” said Huw van Steenis, analyst at Morgan Stanley.
"New regulations such as the Volker Rule – which prohibits proprietary trading – and tougher capital requirements restrict the risk banks can take and are sapping liquidity, bankers say, even though final versions of the rules have not proven as harsh as some feared," the FT said.
It added that Credit Suisse estimates that US government bond trading volumes are down about 8% so far this year compared with the same period in 2013. Mortgage-backed securities backed by the US government is down 41%, but corporate bond trading has increased by 12%.
