Oct 18 In a reversal of fortune for Wall Street
banks that have invested heavily in equities trading, clients
flocked back to bonds last quarter and left stocks behind.
In earnings reports over the past several days, Bank of
America and Citigroup saw massive slides in
equities trading revenue, while Goldman Sachs Group Inc
and JPMorgan Chase & Co posted small increases.
The downturn appears to be a short-term blip related to
market conditions and is unlikely to affect business strategies,
analysts said. Banks have invested in equities trading, even
though it has relatively slim profit margins, because new
capital requirements are generally more lenient on equity
products than bond products.
Still, in an environment where banks are under enormous
pressure to make sure every dollar invested produces a return,
the meager results in equities trading were notable. Analysts
said they would be closely watching performance in the quarters
"While there are some concerns about potential to drive
continued and sustainable growth in equities, the business is
quite a bit friendlier in the new regulatory order," said Nomura
analyst Steven Chubak.
From 2010 to 2015, equities-trading revenue rose 23 percent
across the industry while bond trading fell 36 percent,
according to research firm Coalition. Equities includes revenue
from trading stocks and related derivatives, as well as prime
Bank executives attributed the recent decline to worries
about the U.S. election, Britain's vote to leave the European
Union, and the timing of a rate hike from the Federal Reserve.
Stocks are viewed as riskier than bonds, and investors tend to
shy away from risk when markets are full of uncertainty.
Equities trading was lower simply because of the "natural
cyclicality" of markets, said Ana Arsov, a bank analyst at
Moody's Investors Service. She noted that there was little
volatility in stock markets last quarter, which meant investors
had less reason to trade.
In discussing the decline in equities trading, Bank of
America Chief Financial Officer Paul Donofrio also highlighted
gains in bond trading, arguing that the two businesses can help
offset each other's pain when times are tough.
"You could see gains one quarter in one place and see
something lower in another place, and that's okay with us," he
Among the big Wall Street banks, Citigroup may have the most
Management has said that the bank aims to rank fifth or
sixth globally in equities trading, from a current position of
eighth or ninth.
But in reporting a 23 percent year-over-year drop in
adjusted revenue from the business, senior executives admitted
that Citigroup's investments have not yet paid off - partly
because rivals are also scrambling to scrape market share from a
"I don't put this out there as an excuse, but ... in a very
challenged volume market, it's tough to take share," said
Citigroup Chief Executive Michael Corbat. "In this type of
environment, it just takes a little bit of time."
Citigroup attributed the year-on-year decline to less
trading of equity derivatives. Bank of America said both cash
and derivatives products were less fruitful when reporting a 17
percent revenue decline.
Goldman and JPMorgan saw the business climb a modest 2
percent and 1 percent, respectively.
Morgan Stanley, which has made equities a pillar of
its trading franchise, reports earnings on Wednesday.
(Reporting by Olivia Oran in New York; Additional reporting by
David Henry; Editing by Lauren Tara LaCapra and Nick Zieminski)