After an optimistic first quarter, Wall Street banks are expected to report a drop of almost 25 percent in core trading revenue. JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley are all expected to report similar losses when they announce their second quarter results this week.
According to The New York Times, the “core trading revenue is projected to drop, on average, by as much as 25 percent from the first quarter.” The losses will likely mean that the five Wall Street banks collaboratively took in over $20 billion, mostly due to “business done on behalf of clients.”
Trading is now becoming an increasing source of revenue for the banks, making up 79 percent of Goldman Sachs’ revenue for first quarter 2011, and approximately 21 percent for JPMorgan Chase-marking a seven percent increase since 2007. In the second quarter, trading revenue is expected to be up 10 percent from a year ago, but this will still likely be at a lower level than last quarter.
“It’s gotten bigger, partly because other businesses aren’t firing as vibrantly,” Howard Chen, a financial services analyst at Credit Suisse told The New York Times.
The banks’ lending practices have also been drastically altered, between the general hesitance to take out loans and the recent attention to various questionable loans. Troubled mortgage-backed securities have led to recent multi-billion dollar settlements for Bank of America, but JPMorgan Chase, Wells Fargo, and Citigroup are also expected to face similar fates in the near future.
JPMorgan Chase is expected to face a $9 billion settlement, greatly overshadowed by Bank of America’s recent $20 billion settlement, but significant in comparison to Wells Fargo’s expected settlement totaling $4 billion and Citigroup’s $3 billion settlement.
Bank of America’s settlement is expected to be a sign of the second quarter results to come, with Credit Suisse analysts expecting sales and trading revenues to drop 23 percent from the first quarter.
Both JPMorgan and Citigroup should take a slightly lower blow, with a core sales and trading decline of 20 percent since the previous quarter, and Morgan Stanley may fare even worse with a 25 percent fall. Goldman Sachs, however, may take the largest hit of 36 percent.
These losses are expecting to cause drastic internal changes. The New York Times says that Morgan Stanley will likely make internal cuts, with “plans to slash $1 billion in noncompensation expenses over three years and eliminate several hundred low-producing brokers.” Goldman Sachs will reportedly be cutting 10 percent (approximately $1 billion) of noncompensation expenses within the next year.