Those declines were followed by weak third and fourth quarters that featured investment-banking and trading revenues more than 40 percent off the first-quarter pace. The chances of that trend recurring this year look “increasingly likely,” Kian Abouhossein, an analyst at New York-based JPMorgan, wrote in a note last month.
“Deja vu all over again?” Matt Burnell, a Wells Fargo & Co. analyst, wrote in a June 6 report as he cut profit estimates for the five banks by an average 30 percent. “After a relatively upbeat start to 2012, it now appears that this will be the third consecutive year of a spring/summer swoon.”
Eleven analysts reduced earnings estimates for New York- based Goldman Sachs in the past four weeks, and six have trimmed Citigroup’s, Bloomberg’s survey shows.
The five banks face an environment with lower trading volume, wider credit spreads and heightened volatility. The firms likely will report trading revenue that fell a median of 33 percent from the first quarter, Matthew O’Connor, an analyst at Deutsche Bank AG, said in a May 25 note.
Dollar volume of high-yield corporate bonds has declined 10 percent from the first quarter, while the volume of investment- grade bonds dropped 13 percent, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. Average daily equity-trading volume on the largest U.S. exchanges is up 1 percent from the first quarter.
Trading volume, an indicator of performance, may not correlate directly with firms’ revenue because banks also can profit from changes in the value of the securities they hold and transaction fees that may not be related to volume.
Banks also face widening spreads, which occur when prices of corporate bonds fall relative to government debt. That often leads to losses in bonds that banks hold as trading inventory.
Spreads between global company bonds and comparable government debt widened 35 basis points in the first two months of the quarter to 233 basis points, or 2.33 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. That has reversed more than half the 69 basis- point tightening that occurred in the first quarter.