Wall Street Set for First $100 Billion Trading Year in a Decade

Working from home hasn’t slowed down Wall Street’s trading desks.

The five biggest U.S. investment banks are on pace for their first $100 billion year for trading revenue in more than a decade. In just three quarters, they’ve already generated almost $84 billion, more than any full year since 2010.

Sell-side traders have ridden a wave of activity as markets plunged at the start of pandemic-spurred lockdowns before embarking on dramatic rebounds. Trading gains since the start of the pandemic have helped offset weakness in consumer businesses at the nation’s biggest banks, where loan-loss provisions piled up in the first half of the year.

Capital markets units have “really been the bright spot as far as revenues have gone since the pandemic started,” Jeff Harte, a bank analyst at Piper Sandler, said in a Bloomberg Television interview. “It’s been pretty good earnings, at least from the big banks.”

JPMorgan Chase & Co.,Goldman Sachs Group Inc. andMorgan Stanley all saw trading revenue surge more than 20% for a third straight quarter. The totals weren’t as staggering as the second quarter, which was a record for modern Wall Street’s trading and dealmaking units, but they helped lift Goldman to record per-share earnings and Morgan Stanley to its second-highest profit ever.

The windfall for investment banks as the broader economy suffers has raisedquestions about the Federal Reserve’s policy response and lenders’ role in a recovery. It also raises challenges for how the firms handle paying the traders who’ve brought in the haul. But the gains have ultimately kept profit relatively stable and helped banks avoid the existential questions they faced in the last crisis.

With results in from the six biggest U.S. banks, here’s a look at some of the other key takeaways as Wall Street heads toward finishing a turbulent year:

Stocks Shunned

While the firms’ collective profit rebounded almost back to pre-pandemic levels, investors aren’t treating the biggest banks like they’re out of the woods.

Five of the six banks surpassed analysts’ per-share earnings estimates, but only two saw their stocks climb after reporting.

That continues a yearlong trend where financial firms have been largely left out of the market recovery. Shares of the four largest lenders are all down more than 27% this year, even as the broader S&P 500 has surpassed previous highs. The only sector banks are outperforming is energy.

Commercial Lending

The biggest banks reported a significant drop in commercial loans, after borrowing spiked in the first quarter. The trend is both a good sign for the economy, as companies feel confident enough to repay backup lending facilities they tapped at the start of the lockdowns, and a potential drag on banks’ revenue growth.

JPMorgan,Citigroup Inc. andBank of America Corp. all saw commercial loans on their books drop by at least 10% from the first quarter’s level.

Citigroup saw “significant” loan payments as companies turned to capital markets for cash, Chief Financial Officer Mark Mason said. AtU.S. Bancorp, about 40% of clients paying down loans were issuing bonds, but the remaining 60% were utilizing profits to reduce debt, CFO Terry Dolan said in an interview.

Bank of America saw commercial loan utilization rates at “historically low levels,” but is optimistic that loan demand could pick up in the next few quarters as the economy recovers, CFO Paul Donofrio said. JPMorgan’s CFO Jennifer Piepszak expressed a more guarded outlook.

“We will probably tread water at these levels,” she said. “Increasing CEO confidence with M&A activity and capital investment should be supportive of more normalized loan growth, but that may take some time.”

Branch Plans

The largest banks are using 2020 to further their expansion plans, while regional banks are closing more branches.

JPMorgan said it got approval to enter 10 additional states, which would bring the bank’s branch presence to 48 states. The bank has almost 120 branches in its expansion markets and will open more than another 150, Piepszak said. Bank of America has also been pushing to grow market share, opening 13 branches in new markets during the quarter, Chief Executive Officer Brian Moynihan said.

Regional banks, meanwhile, are speeding up plans to shrink their branch networks. U.S. Bank had announced last year that it would close 10% to 15% of its branches by early 2021, but it told analysts this week that it now plans to close around 25% as customers shift preferences toward digital services.

Among the additional branches U.S. Bank will be closing, most were shut during pandemic-related lockdowns, Dolan said in a phone interview. The bank will be using savings from branch closures to remodel existing locations and open some new storefronts, Dolan said.

U.S. Bank’s acceleration parallels that ofPNC Financial Services Group Inc., which told investors last month that it will close 160 branches this year, twice the number it had originally intended.

Interest Slump

A drop in loans and the Fed’s near zero-interest rate policy is starting to weigh on banks’ revenue. Net interest income at the four largest banks has fallen more than $2 billion in each quarter of 2020, and dropped to the lowest in more than five years in the three months through September.

Typically when rates fall, the rising loan demand allows banks to expand lending and keep interest income at least stable. This time it’s a double whammy: lower rates and less lending.

While Bank of America predicted that the third quarter would be the low point for its net interest income,Wells Fargo & Co. executives warned that their firm could see further declines in 2021.

Part of the decline has come from banks being cautious in deploying the flood of deposits they’ve received in recent months. Cash, Treasuries and other securities effectivelyguaranteed by the federal government now make up more than 35% of the combined balance sheets of the 25 largest U.S. banks, the biggest share in Federal Reserve records going back to 1985.

JPMorgan CEO Jamie Dimon said his firm wouldn’t take more risk just to boost its interest income.

“We have $300 billion of cash we could invest today,” Dimon told analysts on Tuesday. “We’re not going to invest in stuff making 50 basis points, 60 basis points, or 70 basis points so we get a teeny little bit more of NII. We’re going to make long-term decisions for the company and if your NII then gets squeezed a little bit so be it.”

— With assistance by Max Abelson

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