US banks’ trading divisions becalmed as market volatility hits record low
New York — Trading revenue is expected to be a black spot in US banks’ third-quarter earnings, as market volatility remained low, and investors have little hope the fourth quarter will be much better.
US banks’ equity trading volume has been hit by record lows in volatility as investors have less reason to trade if stocks are not moving much.
At the end of the third quarter, the quarterly average for the CBOE market volatility index was at its lowest on record.
On top of this, traders said that equity trading had also been damped by an ongoing rise in popularity of passive investment instruments such as exchange-traded funds (ETFs) over active investing.
Trading volume for fixed income, currencies and commodities (FICC) was also hurt by weak volatility in the quarter. Making matters worse, banks face a difficult comparison with the year-ago quarter when investors were busy reacting to the Brexit vote and preparing for the US election.
"August was very slow. We saw some fits and starts from different headlines in September," said Thomas Roth, head of US Treasury trading at MUFG Securities America in New York.
While S&P banks were still expected to report earnings per share (EPS) growth of 6.4% and revenue growth of 1%, according to Thomson Reuters data, analysts pared their estimates during the quarter as expectations for trading revenue declined.
Revenue estimates were 2.2% lower than where they were July 1 while EPS estimates were 1.8% lower.
Banks in aggregate will report a 16% decline in trading revenue from the year-ago quarter and a 7% decline from the second quarter, according to KBW estimates, following a 10% year-over-year drop in trading revenue for the second quarter.
The third-quarter decline includes a 25% drop in fixed income, currency and commodities trading revenue and flat equity trading revenue, according to KBW.
Executives from JPMorgan Chase, Bank of America and Goldman Sachs all warned in September about weak trading revenue in what they described as a challenging quarter.
Goldman Sachs was expected to see the biggest drop in trading revenue with a 20% overall decline from the year-ago quarter driven by a 40% drop in its fixed income, currencies and commodities trading revenue, according to KBW.
JPMorgan is expected to show an overall drop of 19% driven by a 25% drop in fixed income, currencies and commodities trading revenue and a 2% drop in equity revenue.
Citigroup will see overall trading revenue tumble 16% while Bank of America’s was seen declining 15%. Morgan Stanley was expected to fare the best with a 10% drop in trading revenue, KBW estimated.
Some of the factors that drove trading declines in the third quarter will still be around in the fourth quarter, according to traders and other market watchers.
"Who knows when volatility will pick up?" said Russell Price, senior economist at Ameriprise Financial in Troy, MI.
"Comparisons will be better after the first of the year and we could know more on tax reform so that could help on trading activity," he said.