Analysts are cautioning that fourth-quarter investment banking earnings suffered a significant “early Christmas” slowdown on the back of falling fixed-income revenues. The warnings come just days before the start of the financial sector’s reporting season.
Analysts at J.P. Morgan (JPM) and Morgan Stanley (MS) issued reports Tuesday on the banking industry in which they estimated that investment banking revenues had suffered in the final three months of last year.
J.P. Morgan, which reports earnings Friday, forecasts an average 27% decline in fourth quarter fixed-income revenues.
J.P. Morgan has impressed Wall Street with its low level of delinquent business loans and its supercharged profits from securities underwriting. “Similar to the other capital markets banks, we expect that advisory/underwriting fees will hold up well,” Sanford Bernstein analysts wrote recently.
But the bank’s massive portfolios of credit card, home equity and mortgage loans remain a bellwether for other lenders, which have been battered for quarters by consumers falling behind on payments. Fourth-quarter delinquencies and management guidance could offer insight about when losses might actually peak.
The reports come days after analysts at Barclays Capital and Citigroup (C) published reports saying that investment banking revenues were likely to fall and just ahead of the opening of the bank reporting season, which will begin on Friday with J.P. Morgan Chase & Co.
J.P. Morgan’s report forecasts an average 27% decline in fourth quarter fixed-income revenues, with some banks such as BNP Paribas, Credit Suisse AG and Goldman Sachs Group Inc. (GS) expected to report a more than 30% fall in earnings from their fixed-income divisions for the period.
The fall is blamed on a continued drop in market volatility, which has reduced the profitability of credit and rates trading businesses that had been benefiting from record high bid/offer spreads earlier in the year. Equity revenues are also forecast to decrease for similar reasons, with the report predicting an average 11% fall in earnings from the business.
Morgan Stanley’s analysts expect leading banks, such as Bank of America Merrill Lynch (BAC), Citigroup and J.P. Morgan to report a drop of between 22% and 41% in trading revenues from fixed income, currencies and commodities, with overall trading revenues forecast to fall by as much as a quarter.
