(Reuters) - Wall Street banks will report sharp declines in trading and investment banking revenues in the second quarter because of weaker client activity, JPMorgan analyst Kian Abouhossein said in a report on Friday.
Fixed income, currency and commodities trading revenue is likely to be particularly challenged for a group of banks including Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), dropping 32 percent from the previous quarter, Abouhossein predicted.
The group of eight banks will also report a 14 percent decline in equities trading revenue and a 17 percent fall in investment banking revenue, according to Abouhossein’s estimates based on activity so far.
Although the second quarter is typically slower than its predecessor, Abouhossein’s predicted declines are above-average. He attributed the unusually sharp declines to less liquidity provided by the European Central Bank’s long-term refinancing operation, as well as a “material” drop in client activity because of macroeconomic concerns.
Wall Street has faced revenue challenges for over two years because of concerns about the health of European countries and banks, a changing regulatory environment and the pace of growth in emerging markets. Share prices have remained under pressure as a result.
“Companies like Morgan Stanley and Goldman are black boxes to investors - there’s no way to unravel what their exposures are,” said Keith Davis, an analyst with Farr, Miller & Washington, which manages $800 million and invests in bank stocks. “When things go wrong people sell first and ask questions later.”
JPMorgan’s Abouhossein did not lower earnings estimates for the group of banks, which also included UBS AG UBSN.VX, Credit Suisse Group AG CSGN.VX, Deutsche Bank AG (DBKGn.DE), BNP Paribas SA (BNPP.PA), Societe Generale (SOGN.PA) and Barclays PLC (BARC.L), because his estimates were already well below average analyst estimates.
He said that banks are likely to undergo further restructuring to reduce costs in a weak revenue environment, and to lift capital ratios in anticipation of stricter Basel III capital rules.
Goldman, in particular, may undergo a “more aggressive cost management stance,” Abouhossein said, in order to lift its return-on-equity to 9.8 percent by year-end as revenue slows.
Goldman, which already cut 3,000 workers from its payroll between March 2011 and March 2012, reported return-on-equity of 12.2 percent last quarter. The figure is a key measure of profitability for shareholders and Goldman’s ROE has been challenged recently, down to 3.7 percent last year from levels above 30 percent before the financial crisis.
Reporting By Lauren Tara LaCapra; editing by M.D. Golan