Wall Street’s biggest banks, rebounding after a government bailout, are set to complete their best two years in investment banking and trading, buoyed by 2010 results likely to be the second-highest ever.
The five largest US firms by investment-banking and trading revenue — Goldman Sachs Group, JPMorgan Chase & Co, Bank of America, Citigroup and Morgan Stanley — will likely have a better fourth quarter than the previous two periods, driven by equity underwriting and higher volume in stock and bond trading, according to data compiled by Bloomberg. Even if this quarter only matches the third, the banks’ revenue will top that of any year except 2009.
The surge has come after the five banks took a combined $135 billion from the Treasury Department’s Troubled Asset Relief Program and borrowed billions more from the Federal Reserve’s emergency-lending facilities in late 2008 and early 2009 following the collapse of Lehman Brothers Holdings. Since then, the firms have benefited from low interest rates and the Fed’s purchases of fixed-income securities.
“This is a once-in-a-lifetime opportunity for most of these banks, and I think they’ve recognised it as that,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history. “The profits they’re making now will allow them to replenish their capital and take care of the other things they need to do.”
That may include beginning to return more of their profits to shareholders. The Fed issued guidelines last month on how it will decide whether large US banks may increase dividends and buy back shares.
Capital rules
New rules that will force banks to hold more capital and move derivatives trading to clearinghouses may make it difficult for the firms to continue bouncing back from the worst financial crisis since the Great Depression. Revenue growth may also be threatened by narrower spreads than those that spurred fixed-income trading over the last two years and less client trading, analysts said.
“The strength of 2010 was really front-loaded,” said Roger Freeman, a banking analyst at Barclays Capital in New York. “The best quarter of the year was by far the first quarter, which had some carry-over from the 2009 environment. The other quarters have actually highlighted the challenges in their world right now.”
Those challenges may lead banks to cut bonuses as they seek to reduce costs and boost profitability amid lagging stock prices. Overall pay for investment-banking and trading employees at Wall Street firms will be down 22 per cent to 28 per cent from 2009, according to Options Group, a New York-based executive search and compensation consultant firm.
Goldman Sachs’s compensation expenses in the first nine months were 21 per cent less than a year earlier, while the pay pools at JPMorgan’s and Morgan Stanley’s investment banks were down 10 per cent and 8 per cent. Morgan Stanley has told some employees to expect investment-banking bonuses to decline 10 per cent to 30 per cent, according to two people briefed on the matter. All three firms are based in New York.
The five banks generated $93.7 billion in the first nine months from advisory, debt and equity underwriting, and from trading stocks and bonds, about 10 per cent less than the same period in 2009, when revenue for the year was $127.8 billion.
