While the Federal Reserve’s impending decision on raising interest rates next week and heightened market volatility sparked mixed reactions, the lower trading revenue outlook provided by some of the major banks signified that the earnings picture will remain subdued in the fourth quarter.
At the Goldman Sachs US Financial Services Conference in New York on Wednesday, the two banking giants – Citigroup Inc. C and Bank of America Corporation BAC provided a bleak trading revenue outlook for fourth-quarter 2015. Citigroup expects trading revenue to drop sequentially by 15% to 20%, while BofA anticipates its fixed-income trading revenue to decline sequentially though the percentage is not disclosed.
The lower outlook follows pressurized trading bonds and other fixed-income products revenue, low interest rates and the need to maintain higher capital to meet regulatory requirements.
However, on a year-over-year basis, BofA expects fourth-quarter sales and trading revenue to be up in the mid-single digits, while Citigroup also anticipates a year-over-year increase.
Citigroup’s Chief Financial Officer – John Gerspach and BofA’s Chairman and Chief Executive Brian Moynihan came up with the opinion that the fourth quarter always remains subdued as compared with the other quarters of the year. Moreover, investors’ reactions over the Fed’s decision next week will determine the extent of decline in trading revenues.
In fourth-quarter 2014, BofA recorded sales and trading revenue of $1.74 billion or $2.4 billion, excluding accounting adjustments, down 14% year over year, mainly due to reduced fixed-income revenues.
Further, Citigroup recorded fourth-quarter 2014 equities and fixed-income trading revenues of $2.55 billion, around 14% down from the year-ago period.
“One of the biggest uncertainties out there is: What does the Fed do next week?” Mr. Gerspach said. “Last year was so bad in the fourth quarter, I don’t have a year-over-year comparison,” Gerspach said at the same conference. “I almost want to forget the fourth quarter of last year.”
Gerspach also expects elevated costs in the fourth-quarter 2015 on the possibility of future losses on energy loans. "From an expense point of view, we will be taking a repositioning charge of say about $300 million in Citicorp in the fourth quarter," Gerspach said. "That is as we continue to resize our infrastructure and our capacity to deal with a continuing low-revenue environment." Moreover, Citigroup is expected to increase loan reserves by $300 – $400 million sequentially for energy loans.
We expect banks to remain continually pressurized by lackluster fixed-income trading activities in the near term. Though cost containment efforts are noticeable, revenues have continuously been under pressure over the past several quarters. Considering the tepid economic recovery, we believe that robust top-line expansion will remain elusive in the near term.
Currently, both Citigroup and BofA carry a Zack Rank #3 (Hold). A couple of better-ranked finance stocks include SunTrust Banks, Inc. STI and Old Second Bancorp Inc. OSBC both with a Zacks Rank #2 (Buy).
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