Banks enjoy trading bonanza as markets churn

Frenzied exchanges around the coronavirus crisis helped the world’s largest investment banks increase market revenues by up to 30% in the first quarter, insiders and analysts told The Financial Times.

Traders say that the past few weeks – when Treasury yields plummeted to record lows and stock markets have been repeatedly suspended for exceeding their daily price movement limits – have been among the most active they have never seen, some offices managing more transactions than during the financial crisis. .

“We plan to increase by at least 20 to 30 percent on the 12 [biggest] banks in global markets through equities and fixed income [sales and trading]Said Amrit Shanani, director of research at Coalition, the leading source of data on investment bank earnings.

So far, it’s better than public orientation. Citigroup CFO Mark Mason said on March 11, that its trading revenues in the first quarter would be in the “single digit middle range” and the boss of the investment bank JPMorgan Chase, Daniel Pinto, made the same prediction on February 25.

An insider from a European bank said executives generally left some room in their public statements, and Citi’s figures were probably 5-10% higher than Mr. Mason’s comments.

The largest increases are expected in equities. On average, 9.3 billion shares changed hands every day on the US stock markets in February, the highest level of activity since December 2018, according to data from Sifma, the professional association, and fluctuations in the market in March were even more fierce. A large US bank said it regularly puts twice its usual daily volumes in its cash equity trading division.

“Equity volumes have been” off the charts “and trading company equity trading revenues will reflect strength,” said Gerard Cassidy, analyst at RBC, who recently raised his trading revenue forecast for Bank of America, Citigroup and Goldman in the first quarter. Sachs, JPMorgan Chase and Morgan Stanley.

Insiders of the big US banks said they had gained an inordinate share of the business because they had been able to use their balance sheets to create markets for customers when liquidity was tight in public markets. Goldman Sachs chief financial officer Stephen Scherr said earlier this month that his company is rolling out its balance sheet further.

“We will provide them with liquidity at the bottom and the bottom,” said a stock boss at one of the banks, adding that “deeper pockets” also help companies like his to “get things out” if the markets were evolving against them.

Within equities, cash transactions, especially on electronic platforms, were the strongest, said the bankers, while equity derivatives were the weakest, hinting at potential problems for French banks that dominate this space.

YoY growth in equity income will also be flattered by a mediocre first quarter for activity in 2019, where banks recorded declines of between 14% (JPMorgan Chase) and 24% (Citigroup).

Trade in fixed income securities, currencies and commodities, collectively known as FICC, is expected to perform more mixed. Sifma data shows that bond market volumes also jumped last month, with an average of $ 650 billion changing hands in the U.S. Treasury market, up from a daily average of $ 593 billion in 2019.

“The volatility that accompanies changes in interest rates and exchange rates is really good for banks if it is well managed,” said a senior executive at a world bank. “I suspect that many banks will see a lot of trading activity and that it will be a fairly full quarter.”

Jason Goldberg, analyst at Barclays, said the banks’ fixed income divisions could also show some damage from the fallout from the coronavirus, as some banks suffer losses on bridge loans and other credit facilities through their units FICC.

Ryan added that banks should assess their stock of fixed income securities at market prices at the end of the month and could end up with nursing losses.

The commercial boom is in contradiction with the expected sharp drop in investment banking revenues, the costs of mergers and acquisitions and the costs of initial public offerings having dried up in a climate of uncertainty as to the magnitude of the economic downturn caused by the coronavirus.

The main lending activities of banks will also suffer collateral damage later in the year, with new unemployed and closed businesses taking advantage of coronavirus payment holidays and subsequent defaults. Sharp cuts in interest rates designed to stimulate the economy during the pandemic will also affect the profitability of banks.

The KBW Banks US bank stocks index has almost halved this year.

Even on the positive side of stock trading, insiders believe the reprieve from the misery of the coronaviruses could be temporary. “In the end, if the world deleverages, you would find yourself in deadly calm after the storm,” said a stock boss at a major US bank. “People will not want to do anything.”

Additional reporting by Philip Stafford and Stephen Morris in London

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