US banks offer hope for trading gains after 6-month slump

Bloomberg

US 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. “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.
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 US-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.”
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.”