According to Zhitong Finance APP, as Wall Street's fixed income divisions came under pressure in the third quarter, their counterparts in equities seized a rare opportunity to outshine fixed income peers.
The equities divisions of the five largest U.S. banks are on track to generate more than $66 billion in revenue in the first nine months of the year, roughly $3 billion higher than the expected revenue from bonds, currencies and commodities businesses. This growth was partly driven by prime brokerage operations serving hedge funds and large equity investors.
This means a generation of bond traders is facing the prospect of being surpassed by their equity colleagues on a full-year basis for the first time in their careers. This will not only reshape departmental rankings and bonus allocations, but also challenge a long-held conventional wisdom 鈥?that computers would take over equity trading, thereby eroding fees and revenue.
"Not long ago, people were worried about electronification and equity trading," Goldman Sachs Group (GS.US) CEO David Solomon told analysts. "But today, looking at our equities revenue and the way we've adjusted, the opportunities we face are greater than anyone could have imagined at the time."
The aforementioned nine-month statistics are based on results announced Tuesday by three of the largest banks in the industry, along with analyst estimates for the other two major peers, which are due to report Wednesday.
So far this year, Goldman Sachs' equities trading division has posted two of its best quarterly performances on record. At JPMorgan Chase (JPM.US), equities trading recorded its best third-quarter performance ever, up 49% year-over-year.
Wall Street's fixed income trading divisions are facing headwinds from rising interest rates, which can depress the value of existing bonds and dampen client trading demand. The Federal Reserve raised its benchmark rate in September to curb inflation, and earlier this month, the 10-year U.S. Treasury yield approached its highest level in nearly 25 years.
The same rate-hiking environment that is weighing on trading businesses is actually benefiting banks' traditional lending operations. JPMorgan Chase, Citigroup (C.US) and Wells Fargo (WFC.US) all posted record third-quarter lending revenue, as customer borrowing demand remained strong even as rates rose.
Within fixed income divisions, revenue from rates and spread products weakened, while currencies and commodities showed greater resilience. Among the large banks that reported results on Tuesday, only Citigroup saw its fixed income trading revenue not decline. The company's profit also benefited from standout performance in its services business, which helps corporations and governments move and manage money.
After the quarterly earnings season kicked off on Tuesday, most major U.S. bank stocks traded lower. U.S. banks including Bank of America (BAC.US) and Morgan Stanley (MS.US) are set to report quarterly results on Wednesday.
A team led by Truist Financial analyst Brian Foran wrote in a note to clients that so far within the markets businesses, a tale of two extremes has emerged. Analysts also said that looking at more traditional lending operations, "one camp sees a positive net interest income outlook, strong returns, and capital and consumer spending."
Comments