Bond slump to hit US bank earnings

Many Wall Street banks are expected to report underwhelming second-quarter results this week, after light bond market activity in the spring worsened into a downturn by June, analysts said.

Investor worries spanned the globe last quarter, ranging from fiscal woes in Greece to crashing stock markets in China, to concerns that the US Federal Reserve will not be able to raise interest rates later this year.

“Despite the fact that there was a lot of newsflow and headlines coming out, particularly surrounding Greece, this didn’t translate into a pick-up in activity,” said Steven Chubak, an analyst for Nomura.

Revenue drop

Banks’ fixed income, currencies and commodities (FICC) trading businesses were hurt the most, Mr Chubak and other analysts said. Nomura forecasts an 8 per cent revenue drop for that business across Wall Street, compared to the second quarter of 2014.

US banks may also start preparing for higher loan losses in the coming quarters, after plunging oil prices have made oil producers more likely to default on loans, analysts said. To prepare, banks are expected to set aside more money to cover bad loans, known as “provisioning”.

The move will cut into earnings, and may be an early sign that credit quality among US borrowers is no longer improving after the financial crisis, representing a shift in the credit cycle.

JPMorgan Chase & Co will be the first to report second-quarter earnings tomorrow. Analysts expect $1.44 in profit per share, on average, down 1.4 per cent from the same period a year earlier.

Analysts expect Goldman Sachs, which reports on Wednesday, to have earned $3.92 in profit per share, down 4.5 per cent from the same period a year earlier. Morgan Stanley, which has a smaller bond-trading business and performed particularly poorly in the year-ago period, is expected to produce earnings of 74 US cents per share, up 23 per cent year-over-year. That bank reports earnings on Monday, July 20th.

The average earnings forecasts for Bank of America, which reports on Wednesday, and Citigroup, which reports on Thursday, are significantly higher than the year-ago period because of big legal costs in the second quarter of 2014. However, analysts are forecasting weak capital markets revenue for both banks.

Mike Mayo, a longtime banking analyst with CLSA, also expects banks to report weak second-quarter trading results, but he is more interested to hear what executives will say about the future for Greece, China and interest rates than what is in the rear-view mirror.

“Earnings should be less dramatic than they were a couple years ago, which is a positive development,” he said. “Things are getting back to normal – except for the items that aren’t.” – (Reuters)