This Is What’s Hitting Bank Earnings This Quarter

Worries about the economic slowdown in China discourages investors from making big bets
By Emel Akan
Emel Akan
Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.
October 17, 2015 Updated: October 20, 2015

Revenues of large U.S. investment banks appear to have taken a hit from weak trading conditions. JPMorgan, Citigroup, and Goldman Sachs reported weaker quarterly earnings and all shared the same problem—steep declines in bond-trading volumes.

“We experienced lower levels of activity and declining asset prices during the quarter, reflecting renewed concerns about global economic growth,” said Goldman Sachs CEO Lloyd C. Blankfein, in a statement.

Goldman Sachs reported $6.9 billion in revenues in the third quarter with an 18 percent year-on-year decline, with profits plunging 38 percent to $1.4 billion.

The bank’s revenue from fixed-income, currency, and commodity trading fell 33 percent for the same period. It was the biggest year-over-year drop in the last eight quarters.

“Our clients evaluated the potential implications of a slowing Chinese economy, the decision by the People’s Bank of China to devalue its currency, and the resulting volatility in global markets,” said Harvey Schwartz, CFO of Goldman Sachs at an earnings call on Oct. 15.

JPMorgan, the largest U.S. bank by assets, reported $23.5 billion in revenues in the third quarter, a 6.4 percent decline year over year.

Revenues from trading fixed-income, currencies, and commodities slumped 22.6 percent to $2.9 billion. When adjusted for the sale of a physical commodities business and other changes, the decline would have been 11 percent, the company said.

According to Marianne Lake, CFO of JPMorgan, it was tougher to make money because of the low levels of activity. She offered little hope on markets revenue for the next quarter and said the markets are pretty quiet across all asset classes in October.

“It’s too early to give a specific guidance, but based on those facts alone, analyst estimates appear high,” she warned.

Citigroup, the third largest U.S. bank by assets, also reported a decline in third quarter revenues. The company recorded $18.5 billion in revenues, with an 8 percent year-over-year decline. Thanks to lower expenses and net credit losses, profits for the same period rose 36 percent to $4.2 billion.

The bank said the fixed-income revenues were under pressure as uncertain environment dampened client activity in the market products. Citigroup’s fixed-income revenues were down 16 percent in the third quarter.

Slowing growth and shifting consumer sentiment mainly in Asia impacted the banks’ consumer banking business as well.

For the quarter ahead, the bank said it has no clarity on many important issues.

“Predictions on the timing of an interest rate increase seem to change every day. We don’t yet know the long-term impact of recent volatility on consumer and business sentiment. And in many large markets, there are high degrees of political risk, which have economic ramifications” said Michael Corbat, CEO of Citigroup at an earnings call on Oct. 15.

IPO Activity Stalls

Another common theme for the investment banks in the third quarter was the reduced viability for IPOs, which slashed the revenues from underwriting activities.

Higher market volatility and a decline in prices postponed industry-wide IPOs and secondary offerings.

Goldman Sachs reported a 55 percent year-on-year decline in third quarter equity underwriting fees. Citigroup said the equity underwriting business was down 43 percent due to lower activity. JPMorgan also recorded a decline of 35 percent in equity underwriting fees.

Oil Exposure Still a Concern

Given the expectations that energy prices will remain lower for a longer term, both JPMorgan and Citigroup have increased their credit loss reserves for the oil and gas sector.

In terms of exposure, Goldman Sachs said it is not a big lender to the energy space. The bank announced it has less than $200 million exposure to energy trading houses.

Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.