|
Jun 11, 2012 8:23 AM GMT+0800 Wall Street bankers and traders, given hope by a market rebound inthe first quarter, are now seeing earnings and paychecks threatenedby turmoil in Greece in what is becoming an annual cycle. For a third consecutive year, revenue from investment banking andtrading at U.S. firms may fall at least 30 percent from the firstquarter, Richard Ramsden, a Goldman Sachs Group Inc. (GS) analyst,said in a note last week. Greece, which gave English the word cycle, has been the main reason each year that the secondquarter soured after a promising first three months. Deal volume has dropped and equity and credit markets have fallenon concern that Greece may abandon the euro and the Europeansovereign-debt crisis will spread to nations including Spain. Thoseeconomic issues cut profit, bonuses and jobs at Wall Street firmsin last year s second half and threaten to do the same in 2012. It s going to be a tough summer at least, and it does feel likethe last couple years all over again, said David Konrad, ananalyst at KBW Inc. in New York. The bank valuations seemunfairly discounted, but investors are looking at this year andsaying, I m not going to fall for this again. Stiffer Rules Greece is compounding the impact of stiffer capital rules andtrading restrictions for banks imposed after 2008 s credit crisis.Those measures already were fueling concern that the industry maybe locked in a long-term slump. Combined trading andinvestment-banking revenue at the five biggest Wall Street banks --JPMorgan Chase & Co. (JPM), Goldman Sachs, Bank of AmericaCorp. (BAC), Citigroup Inc. (C) and Morgan Stanley -- is likely todrop from a year earlier for the seventh time in eight quarters,according to analysts surveyed by Bloomberg. The five banks generated about $33 billion from those businesses inthe first three months of the year, excluding accounting charges.That was led by $20 billion from fixed- income trading. Revenue from trading typically peaks in the first quarter in partbecause corporations raise more debt at the beginning of the year,stoking fixed-income operations, said Roger Freeman, an analyst atBarclays Plc. Still, a normal seasonal decline for fixed-income trading revenuein the second quarter is 15 percent, while this year probably willbe 30 percent to 40 percent, Goldman Sachs s Ramsden said. Lastyear, the second-quarter drop for U.S. firms was about 31 percent,while in 2010 it was more than 40 percent. Deja Vu Those declines were followed by weak third and fourth quarters thatfeatured investment-banking and trading revenues more than 40percent off the first-quarter pace. The chances of that trendrecurring this year look increasingly likely, Kian Abouhossein,an analyst at New York-based JPMorgan, wrote in a note last month. Deja vu all over again? Matt Burnell, a Wells Fargo & Co.analyst, wrote in a June 6 report as he cut profit estimates forthe five banks by an average 30 percent. After a relativelyupbeat start to 2012, it now appears that this will be the thirdconsecutive year of a spring/summer swoon. Eleven analysts reduced earnings estimates for New York- basedGoldman Sachs in the past four weeks, and six have trimmedCitigroup s, Bloomberg s survey shows. The five banks face an environment with lower trading volume, widercredit spreads and heightened volatility. The firms likely willreport trading revenue that fell a median of 33 percent from thefirst quarter, Matthew O Connor, an analyst at Deutsche Bank AG,said in a May 25 note. Corporate Bonds Dollar volume of high-yield corporate bonds has declined 10 percentfrom the first quarter, while the volume of investment- grade bondsdropped 13 percent, according to Trace, the bond- price reportingsystem of the Financial Industry Regulatory Authority. Averagedaily equity-trading volume on the largest U.S. exchanges is up 1percent from the first quarter. Trading volume, an indicator of performance, may not correlatedirectly with firms revenue because banks also can profit fromchanges in the value of the securities they hold and transactionfees that may not be related to volume. Banks also face widening spreads, which occur when prices ofcorporate bonds fall relative to government debt. That often leadsto losses in bonds that banks hold as trading inventory. Spreads between global company bonds and comparable government debtwidened 35 basis points in the first two months of the quarter to233 basis points, or 2.33 percentage points, according to Bank ofAmerica Merrill Lynch s Global Broad Market Corporate Index. Thathas reversed more than half the 69 basis- point tightening thatoccurred in the first quarter. Volatility Index U.S. high-yield bond spreads widened 0.97 percentage point to 6.96percent in the first two months of the second quarter, according toMerrill Lynch s U.S. High Yield Master II Index. The Chicago Board Options Exchange Volatility Index (VIX), or VIX,which measures the cost of buying insurance against drops in theStandard & Poor s 500, had an average price of 20.02 so far inthe second quarter, up from 18.20 in the first quarter and 16.76 ayear earlier. Typically, volatility brings spikes in trading volume as moneymanagers change holdings in response to the environment. Thathasn t happened in recent months, Freeman said. The bouts of volatility aren t driving a lot of volume because,for the most part, portfolios have remained pretty defensive andutilized little leverage, so there s not much portfolio churningor repositioning, he said. The stability in the first quarterwasn t long enough to drive a risk upgrade. Cyclical Business Greece is prompting declines as banks face questions about whetherthey re experiencing a so-called secular, or lasting, shift intheir capital-market businesses amid new regulations and slowerglobal growth. The industry will see little-to-no growth in thetotal revenue pool over the next few years and needs to cut 20percent to 30 percent of its managers, Boston Consulting Group Inc.said in an April 26 report. JPMorgan Chief Executive Officer Jamie Dimon, 56, and Goldman SachsCEO Lloyd C. Blankfein, 57, are among top bankers to argue thecurrent slowdown is a cyclical decline that will bounce back. We re in a cyclical business, we ve always said we re in acyclical business, Goldman Sachs President Gary Cohn, 51, said atan investor conference last month. And we re in that part of thecycle where our client base is tending to be more conservative thanit is in the up parts of the cycle. If revenue remains low, banks will likely be forced to makeadditional cost cuts through lower pay and firings, analysts said.Trading units at the large banks may need to cut 10 percent oftheir staff, said David Trone, an analyst at JMP Securities LLC. Job Losses Banks already scaled back as revenue slumped last year. About 14percent of investment-bank employees got no bonus for 2011, up from6 percent the year before, according to a poll by executive-searchfirm Options Group released last week. The financial industry alsoannounced more than 200,000 job cuts, led by Bank of America andLondon-based HSBC Holdings Plc, which each said they will eliminate30,000 positions. I wouldn t expect to see something that significant, but quietlytrimming groups of people, that s probably already happening, said Shannon Stemm, an analyst with Edward Jones & Co. in St.Louis. Revenue Prospects Goldman Sachs cut fewer than 50 jobs about two weeks ago to trimexpenses as the bank s revenue prospects worsen, a person familiarwith the matter said. New York-based Morgan Stanley (MS) ispreparing to cut some employees in its trading business, accordingto two people with knowledge of the plans. It s not like normal downturns where you re coming off a peakand you get a lot of excess people, Trone said in an interviewlast week on Bloomberg Television s Surveillance Midday program. I don t think cost cuts are a good lever at this point.You ll get a little out of it, but not much. The S&P 500 Financials Index (S5FINL) of 81 companies hasfallen 11 percent this quarter after climbing 21 percent in thefirst period. Morgan Stanley has dropped 30 percent this quarter,while JPMorgan, Citigroup, Goldman Sachs and Bank of America haveall declined more than 21 percent. Investors still have interest in the group because the stocks haveshown large moves to the upside as well, Konrad said. From Dec. 8,the day the European Central Bank announced its longer-termrefinancing operation to help provide liquidity to the region slenders, through the end of March, the five banks jumped an averageof 39 percent, led by Charlotte, North Carolina-based Bank ofAmerica s 71 percent surge. Deal Slowdown The tough part for investors is it would be tempting just to say I m going to walk away from the group, but we ve also seenthese stocks can move up 30 percent on just some more breathingroom, Konrad said. Because the capital and liquidity is sostrong at these financials, any program that the market likescoming out of Europe is going to have a strong impact on thevaluations. Spokesmen for the five banks declined to comment or didn t returnrequests for comment. The concern that Europe s debt crisis will spread or that theeconomic union would splinter has crimped deal activity as well,Stemm said. Global equity issuance is on pace to be down 8 percent from thefirst quarter and 29 percent from the second period of 2011,according to data compiled by Bloomberg. Issuance of U.S. bonds ison pace to fall 39 percent from the first quarter and 11 percentfrom last year s second quarter. Announced mergers andacquisitions are on pace to drop 25 percent from a year earlier. That will lead to the banks reporting investment-banking revenueabout 10 percent lower than in the first quarter, O Connorestimates. The number of events that have produced marketturbulence also is having a cumulative effect of companies andinvestors, Freeman said. Every time investors -- institutional, corporate and retail --get smacked with one of these bouts of volatility, it feels likethe recovery time is a little longer, a little slower springeffect, Freeman said. I am an expert from cartridge-filter-housing.com, while we provides the quality product, such as China Industrial Filter Housing , China Car Wash Water Recycling System, Bag Filter Housing,and more.
Related Articles -
China Industrial Filter Housing, China Car Wash Water Recycling System,
|
