Charge buoys bonus blues
Impressive second-quarter Wall Street revenue a boost to bankers and traders accustomed to annual profit plunge
Wall Street banks, buoyed by record stock-market prices and high-yield bond issuance, will probably report a jump in second-quarter trading and investment-banking revenue from the same period a year ago.
Trading revenue at the five largest firms may rise 13 per cent from a year earlier and investment-banking revenue could climb 17 per cent, Matt Burnell, a Wells Fargo & Co analyst, wrote in a research note this month. While that represents a 16 per cent fall from the first three months, it would be the smallest percentage drop from the first quarter since 2009.
The improvement is helping propel bank stocks to their best first half in 16 years as Wall Street looks for a recovery in trading, underwriting and advisory work. Each of the past three years featured a second-quarter disruption from global events such as the European debt crisis that presaged a weaker second half after a promising start.
Combined trading and investment-banking revenue at the five biggest Wall Street banks - JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America Corp and Morgan Stanley - may top US$25 billion in the quarter, based on Burnell's estimates. That would push the first-half total higher than in 2012. The five firms generated about US$30.6 billion from those businesses in the first three months, excluding accounting charges, down about 8 per cent from a year earlier.
The outlook has helped boost bank stocks, which are headed to their best first half since 1997. The S&P 500 Financials Index of 82 companies has risen 8.8 per cent this quarter after climbing 11 per cent in the first three months. Morgan Stanley has jumped 20 per cent this quarter, while JPMorgan, Citigroup and Goldman Sachs are each up more than 11 per cent. Bank of America shares have gained about 9 per cent.
The figures will no doubt boost bankers sweating over their end-of-year bonus, and traders tired of the regular slump in their second-quarter commissions.
Michael Cavanagh, co-head of JPMorgan's corporate and investment bank, said last month that trading revenue was about 10 per cent to 15 per cent greater at that point in the quarter than a year earlier. The bank's chief executive Jamie Dimon said last week that JPMorgan, which has more trading revenue than any other bank, would probably do even better than that.
Last year, deal volume and equity and credit markets fell on concern that Greece would abandon the euro and the region's sovereign-debt crisis would spread to nations including Spain.
"Last year was somewhat of a more hindered quarter in terms of struggles in Europe and a real lack of volume," Citigroup CEO Michael Corbat said recently at an investor conference in New York. "Clearly, what you'll see is the cyclicality from the second quarter being less than the first quarter, but I don't think you'll see that big drop-off or the same kind of drop-off that we saw last year."
While underwriting and trading has improved in Europe, economies in other parts of the world have threatened to derail trading results in recent weeks.
Equity markets have also been driven higher as investors placed more money into equity funds. New combined flows into domestic and international stock funds were positive in each of the first five months this year, after outflows in a total of 11 months in 2012, according to data from the Washington-based Investment Company Institute. That pushed the S&P 500 to a record level and the MSCI World Index to its highest since 2008.
Global equity issuance could be up 45 per cent from the second quarter of 2011 and down 3 per cent from the first three months, according to data compiled by Bloomberg.
"Confidence is high right now, but that could turn at any minute," David Trone, an analyst at JMP Securities in New York said in an interview last month. "This market rally, I don't get it. I don't get it personally, I don't get it professionally, but hey, who wants to take the punch bowl away from the party?" Bloomberg and staff report