Wall Street banks eye ‘new normal’ for trading revenue after stellar two years

A street sign, Wall Street, is seen outside the New York Stock Exchange (NYSE) in New York City, New York, US January 3, 2019. REUTERS/Shannon Stapleton/File Photo

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NEW YORK (Reuters) – Wall Street banks expect trading revenue to stabilize at a “new normal” somewhere between pre-pandemic levels and the highs of the past two years, executives and analysts said.

The massive injection of cash into the capital markets by the Federal Reserve has led to unprecedented liquidity and business activity through the pandemic as investors have sought opportunities to cash in. But trading yields at leading Wall Street banks declined in the fourth quarter as markets returned to normal and the Federal Reserve expanded to support asset purchases. Read more

Banks with large trading desks such as Goldman Sachs (GS.N), JPMorgan (JPM.N) and Morgan Stanley (MS.N) have been the biggest beneficiaries of market volatility, enabling traders to enjoy their best periods since the 2007-2009 financial crisis.

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Now, they are faced with the realization that the favorable market backdrop will not last forever.

David Solomon, CEO of Goldman Sachs, told analysts after the bank on Tuesday reported earnings below market expectations. Read more

“We don’t see that in any way as a permanent environment that will continue at this pace,” Solomon said.

He added that the bank was still seeing “reasonable” activity in 2022 and that the business could thrive no matter the market conditions.

Executives at rival JPMorgan Chase & Co (JPM.N) took a similar tone last Friday after the country’s largest bank reported disappointing earnings. Read more

CFO Jeremy Barnum told analysts: “In our central case, markets and banking services are somewhat back to normal in 2022 compared to their respective record years in 2020 and 2021 and resumed modest growth after that.”

Barnum said volumes will remain high in 2022.

“The start of the rate-raising cycle could be quite healthy for fixed income returns in particular,” he said.

Analysts also expect the general environment to remain positive for business activity, albeit lower than the levels of the past two years.

“The benchmarks from 2020 to 2021 are pretty high,” said Devin Ryan, an analyst at JMP Securities, part of Citizens Financial Group. “We will likely see some normalization and the industry is trying to figure out what that normalization will look like.”

On Wednesday, Morgan Stanley said trading revenue fell 26% in the fourth quarter. The bank said that while equity trading revenue rose 13%, those gains were offset by a 31% drop in fixed income trading revenue. Read more

Executives at Goldman Sachs, JPMorgan and Morgan Stanley reiterated their confidence to retain market share gains made during the pandemic, in part due to the decline in European banks.

Goldman, in particular, has focused on doing more trading on behalf of its largest corporate clients.

“There is still a positive side for us from a portfolio sharing perspective, given the broad client base,” Solomon said. “We will take a more sustainable share of the opportunities presented by the market.”

Most analysts believe that the business prospects are better than people expected.

“The trading outlook is more optimistic,” said Koch Joel, senior research analyst at Neuberger Berman in New York. “You won’t go back to 2019.”

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(Reporting by Matt Skovham in New York; Editing by Matthew Lewis)

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