The casino isn’t paying off the way it used to for the big banks, but don’t count them out just yet.
So says Sanford Bernstein analyst Brad Hintz. He says Goldman Sachs (GS), JPMorgan (JPM) and their peers are headed for another profitable quarter, but warns that trading riches are making themselves scarce.
“Trading volumes look a little light,” Hintz said Monday on Bloomberg Television. “Will trading be a much smaller business going forward? That is what you are seeing in terms of the relative performance.”
Relative performance hasn’t been much to write home about lately. Since the S&P 500 hit its recent peak Feb. 16, Morgan Stanley (MS) and Citi (C) are off 9%, Bank of America (BAC) is down 7% and Goldman and JPMorgan each has lost 6%.
That compares with a 3% decline in the S&P 500, following its fastest double in history.
Weaker trading is one of the big banks’ many problems, along with tightening capital and liquidity rules and increasing competition. But another widely discussed challenge – the prospect that the bond market may hit the wall once the Federal Reserve stops shoving it forward with massive bond purchases, rattling the banks’ giant fixed income businesses – doesn’t strike Hintz as being inevitably damaging to the banks.
Many commentators saying the second half of this year may reprise the bond market rout of 1994, with rates rising sharply across the board. That could punish banks’ fixed income business, which has accounted for a huge share of profits in recent years.
But Hintz sees parallels with the head-scratching action in 2005 – when the rate rise was concentrated at the short end of the curve in a twist that left many observers, notably Alan Greenspan, unable to fully explain what was going on.
Whatever was going on, it ended up being good for the banks, Hintz concludes.
In 2005, you had equity analysts saying the end of fixed income was at hand. And it didn’t happen. What happened is we had a yield curve that twisted, and because it twisted, you had uncertainty about where you should put your bets as a fixed income portfolio manager, so you had money moving back and forth. That is how the Street makes its money.
Thank goodness for small bond market favors.
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