Wall Street banks are expecting trading revenue to settle at a "new normal" somewhere between pre-pandemic levels and the highs of the past two years, top executives and analysts say.
A massive injection of cash into capital markets by the Federal Reserve led to unprecedented liquidity and trading activity through the pandemic as investors sought opportunities to cash in. But trading revenue at leading Wall Street banks fell in the fourth quarter as markets normalized and the Fed scaled back its asset purchases.
Traders Rake It In
Banks with large trading desks such as Goldman Sachs, JPMorgan and Morgan Stanley have been the biggest beneficiaries of market volatility, enabling traders to enjoy their best period since the 2007-09 financial crisis.
Now, they face the realization that the favorable market backdrop will not last forever.
"None of us could have anticipated the environment that we've lived through over the last two years and particularly the environment this year, which was obviously a significant tailwind for our business," Goldman Sachs' chief executive, David Solomon, told analysts after the bank on Tuesday posted earnings that fell short of market forecasts.
"We in no way see that as a permanent environment that's going to continue at this pace," Solomon said.
He added that the bank was still seeing "reasonable" activity in 2022 and that the business could thrive whatever market conditions materialize.
Rival Morgan Stanley does not expect trading volumes to fall back to pre-pandemic levels, Chief Financial Officer Sharon Yeshaya said in an interview on Wednesday.
"We have seen differentiation in global central bank policies, which should make for more active markets," she said. "We've been able to gain market share, and that positions us particularly well as we go into 2022."
Executives at rival JPMorgan Chase & Co struck a similar tone last Friday after the country's largest bank posted earnings that disappointed.
2022 Seen as a Year of 'Normalization'
"In our central case, markets and banking normalized somewhat in 2022 relative to their respective record years in 2020 and 2021 and resume modest growth thereafter," Chief Financial Officer Jeremy Barnum told analysts.
Barnum said trading volumes would still remain elevated in 2022.
"The beginning of a rate-hiking cycle could be quite healthy for fixed income revenues in particular," he said.
Analysts also expect the overall environment to remain positive for trading activity, albeit below the levels of the past two years.
"The bar from 2020 and 2021 is quite high," said Devin Ryan, an analyst at JMP Securities, part of Citizens Financial Group. "We'll probably see some normalization and the industry is trying to figure out what that normalization will look like."
On Wednesday, Morgan Stanley said trading revenue fell 26% in the fourth quarter. While equity trading revenue rose 13%, those gains were wiped out by a 31% slump in fixed income trading revenue, the bank said.
Executives at Goldman Sachs, JPMorgan and Morgan Stanley have emphasized their confidence about holding on to market share gains achieved during the pandemic, in part a result of European banks retreating.
Goldman, in particular, has focused on doing more trading on behalf of its biggest corporate clients.
"There's still upside for us from a wallet share perspective, looking at the broad client base," said Solomon. "We'll take more sustainable share from what opportunity the market presents."
Trading Still Looks Promising
Morgan Stanley's Yeshaya expressed similar sentiments: "We feel good about holding or gaining market share as we look ahead," she said.
Most analysts believe prospects for trading businesses are better than people were anticipating.
"The outlook for trading is more optimistic," said Kush Goel, senior research analyst at Neuberger Berman in New York. "It's not going back to 2019."
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