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U.S. banks’ windfall keeps Wall Street booming

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Fourth consecutive quarter results from JPMorgan Chase and Citigroup have eased fears that the Wall Street boom will run out of steam, paving the way for strong earnings from Goldman Sachs and Morgan Stanley next week.

JP Morgan reported a 20% increase in trading income year over year, driven by a 32% increase in equity trading income. CitiThe company’s equity trading income grew 57 percent on the same basis, while its total income from trading in stocks, bonds and derivatives rose 14 percent.

The good quarter ended an exceptional year for Wall Street, as volatility inspired by the coronavirus pandemic – and central bank actions aimed at mitigating the economic impact – led to market conditions described as “nirvana” By the head of trading at a large bank.

Senior Wall Street executives have spent months pointing out the extraordinary nature of the markets and denouncing the prospect of a continuing boom.

“It was definitely better than expected,” said Gerard Cassidy, analyst at RBC, of ​​the fourth quarter trading income reported by JPMorgan and Citi, both of which released their results on Friday. “The fourth quarter is the weakest[seasonally]. . . the numbers were very strong.

Mr Cassidy said Morgan Stanley is expected to be a particularly big beneficiary of the trends seen in Friday’s earnings because it had such a lot of stock trading activity. In the first nine months of the year, Morgan Stanley made $ 7.3 billion in trading shares, the highest of any Wall Street bank, and higher than the $ 7.16 billion qu ‘He realized in fixed income.

Goldman Sachs’ trading activity is more focused on fixed income, where it made about 57% of its $ 17 billion trading revenue in the first nine months of 2020.

Mike Mayo, analyst at Wells Fargo, said Goldman’s results would also be supported by strong income from investment banking, which includes everything from advising clients on mergers and acquisitions to helping increase debt and equity.

JPMorgan reported fourth quarter investment banking income up 37% year on year, although Citi investment banking income fell nearly 5% on the same basis.

Mr Mayo said Goldman should do well in investment banking, in part because it was strong in the burgeoning field of using “blank check” on the Spac company list, and in part because she traditionally won shares in busy quarters.

“There’s a good chance Goldman will be best in class for the fourth quarter and top performer,” he added.

Bar chart of the percentage increase in trading revenue for the first nine months of 2020, year over year, showing the Wall Street windfall in the first 9 months of 2020

For Goldman, the relative strength of its traditional trading and investment banking powers complicates management’s desire to derive more profit from its more stable businesses like retail banking and cash management.

“When they build successful years like 2020, it’s hard to grow these other businesses in ways that are significant enough to diversify revenues,” Mr. Cassidy said.

Goldman has promised its fourth quarter results will include an update on the strategy it unveiled a year ago. To stay true to the original vision, Mr. Cassidy said the bank should take excess profits from trading and investment banking and invest them in new companies, rather than seeing strong 2020 results as a reason. to go back to Goldman’s roots.

While noting the good investment banking pipeline and strong near-term market outlook, fueled by the stimulus and Federal Reserve interventions, senior executives at JPMorgan and Citi both noted that the tide would eventually turn.

“We have had an amazing year,” said Citi CFO Mark Mason. “The industry has seen strong growth in its portfolio in the markets, and this needs to normalize at some point.”

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