Optimism wanes as traders expect another depressed fourth quarter
Alas, the surprise rebound in trading revenue for big banks during the third quarter appears to have been event-driven, rather than some systematic rebound that many were hoping would continue. Trading revenues will again tumble during Q4, and things may get worse before the markets eventually reach a new normal.
Both Bank of America and Citigroup warned on Tuesday that trading totals for the final three months of the year are likely to disappoint. Citi Chief Executive Michael Corbat said the bank expects a 5% dip in trading revenue compared to last year’s fourth quarter. Bank of America CEO Brian Moynihan didn’t provide a granular approximation, but did say that revenue will be down from Q3 and year-over-year.
Frankly, the news isn’t all that surprising but is nonetheless deflating for equities and fixed income traders who saw atypical spikes in activity and volatility during the third quarter that brought some hope. But the shot in the arm during Q3 appeared to be driven by one-off events, including a rebound in Europe and the sudden exit of Bill Gross from Pimco, which woke up the otherwise sleepy bond market.
Likely, other Wall Street banks’ earnings reports will mirror those of Citi and Bank of America. In fact, they could be worse. J.P. Morgan and Goldman Sachs have historically relied more heavily on their trading desks than rivals. Expect the culling of traders to continue and compensation to fall further, particularly in fixed income. Corbat said Citi “didn’t escape” the sharp moves in FICC during the first two months of the quarter, according to the Wall Street Journal.
Meanwhile, Citi has some other problems. Corbat said the bank will incur a $3.5 billion charge for its fourth-quarter, split between restructuring and litigation costs. Still, the quarter will be "marginally profitable,” he said.
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