Weak Q4 for 'big five' investment banks in US

Goldman Sachs, one of the big five investment banks in the US, is expected to report lacklustre profits from trading. The other four are JP Morgan Chase, Citigroup, Morgan Stanley and Bank of America.
Goldman Sachs, one of the big five investment banks in the US, is expected to report lacklustre profits from trading. The other four are JP Morgan Chase, Citigroup, Morgan Stanley and Bank of America.PHOTO: REUTERS

Run-up to Fed's historic interest rate rise fails to boost crucial trading business

NEW YORK • The "big five" investment banks in the United States are set to post more lacklustre profits from trading in the last three months, results to be presented in the coming weeks are expected to show.

The run-up to the Federal Reserve's historic interest rate rise failed to boost crucial trading businesses for JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup, the Financial Times has reported.

The latest set of weak figures underlines how structural challenges - like the Volcker ban on proprietary trading and a shift towards electronic platforms - are weighing on investment banks, which generated even less revenue in the last three months than in the troublesome third quarter, the FT said.

In total, the big five produced US$8 billion (S$11.5 billion) of revenues from their core debt sales and trading businesses in the quarter, Credit Suisse estimates.

This represents a mere 2 per cent improvement from an especially tough period a year ago, and a 15 per cent drop from the previous quarter.

The end of the year is a traditionally quieter time as investors wind down ahead of the festive break. Yet Mr Brennan Hawken, an analyst at UBS, said the fourth quarter was weaker than normal.

Nervous investors did not do much over persistently weak oil prices combined with mounting fears over China, he said.

Jitters continued into the new year, Mr Hawken added, exacerbated by political tensions in Saudi Arabia and North Korea. "This type of environment is really, really bad," he said.

The corporate deal-making boom helped relieve some of the pressure. But fees from mergers and acquisitions were equivalent to just one-tenth of those from sales and trading at nine top investment banks over the first nine months of last year, the FT report said.

The Fed's rate increase came just two weeks before the end of the quarter, limiting its positive impact on the financial results.

"Going into the fourth quarter, many investors felt there would have been a pick-up from the third, largely because of expectation that the Fed was going to increase rates," said Mr Gerard Cassidy, an analyst at RBC Capital Markets. "These hopes were dashed."

Mr Ken Usdin, an analyst at Jefferies, said the big question for 2016 is whether losses from energy and other "over-leveraged" sectors are fully offset by gains from net interest margins. "If not, there will be even greater challenges for banks."

But, in their quest for higher profits, the banks have seized on cutting costs. The banks, which include Wells Fargo, will spend US$61.8 billion on items including employee compensation, marketing and real estate in the fourth quarter, the lowest total for a quarter since the final three months of 2008, Bloomberg reported, citing analysts' estimates.

The big lenders have announced cost-cutting programmes with catchy names and set targets for efficiency ratios, a measure of how much it costs to produce one dollar of revenue.

As part of an initiative dubbed Project New BAC, Bank of America Corp said in September 2011 that it planned to let go of 30,000 workers and consolidate 63 data centres inherited through acquisitions.

The following year, Wells Fargo set an efficiency-ratio target in a range of 55 per cent to 59 per cent, and in March 2013, less than six months after getting the top job at Citigroup, CEO Michael Corbat set a 2015 target of about 55 per cent.

Bank of America cut headcount by about 75,000 employees over the four years through September.

Since the end of 2010, Goldman Sachs has cut costs by 14 per cent.

Operating units also have been asked to slim down, with management teams taking their scalpels to institutional businesses and consumer operations alike. Banks have trimmed branch networks as clients move to mobile phones, while more trading goes digital, reducing the reliance on human beings.

A version of this article appeared in the print edition of The Straits Times on January 12, 2016, with the headline 'Weak Q4 for 'big five' investment banks in US'. Print Edition | Subscribe