Big Banks Run Aground On Trading Revenue During Volatile Third Quarter, But Many Eke Out Earnings Gains

Goldman Sachs dealt investors a disappointing hand Thursday, with quarterly profits down 36 percent from a year ago. The bank’s lackluster showing comes as the nation’s largest lenders reported slumping trading volumes amid global market instability. Yet despite falling revenues, particularly in bond, currency and commodities trading, some major lenders managed to post higher profits.

In addition to Goldman, revenues came in lower year-over-year at Bank of America, JPMorgan Chase & Co. and Citigroup, each of which saw trading revenue down from the year before. But the latter three still eked out profit gains, due to cost cuts and drops in legal costs.

The summer’s wild market moves played a central role in this week’s earnings news. Perhaps the most dramatic indication of market troubles rubbing off on banks was a sharp decline in revenue at Goldman Sachs’ Investment and Lending division, a catch-all unit containing a mix of debt and equity. Revenue in the unit fell 60 percent from the third quarter a year before.

On a call, Goldman finance officer Harvey Schwartz called the July-Sept. period “a much tougher quarter” for trading. The bank missed analysts’ expectations with earnings per share of $2.90, below the predicted $2.91. Still, Goldman stock was up 1 percent on a day that saw the financial sector rebounding from Wednesday's declines.

Although investment bankers often lick their lips during periods of high volatility, lurching markets in August and September kept many investors on the sidelines, drying up trading revenues. Continued uncertainty over the timing of the Federal Reserve’s interest rate liftoff added to the unease.

The only major bank to buck the falling revenues trend was Wells Fargo, whose retail-banking focus limited the firm’s exposure to market gyrations. Although mortgage origination fell behind, Wells Fargo’s lending profits rose 1.7 percent to $10.8 billion.

“Wells Fargo continues to be a consistent performer,” said Allen Tischler, an analyst with Moody’s. “In challenging environment they continued to report stable, slightly positive trends.”

One major headwind for Wells Fargo and others is the Federal Reserve’s ongoing reluctance to rise interest rates from the near-zero nadir they have maintained for the last seven years. Lenders are itching for the higher interest margins that come with a Fed liftoff. The odds of a rate rise occurring in 2015 appear to be narrowing.

To combat falling revenues, banks have tightened their belts. Bank of America reported shuttering 206 branches in the past year, while Citigroup said it did away with nearly 300.

Meanwhile, Goldman Sachs cut its bonus pool by 16 percent from a year ago, even as the employee count notched up 10 percent. JPMorgan slid a big tax one-time tax benefit into its earnings for the quarter. Excluding one-off items, the nation’s largest lender posted a $1.32 earnings per share on $6.8 billion in net profits, below analyst expectations.

Despite slumping midweek, financial stocks were up Thursday. Citigroup led the pack, up 3.15 percent Thursday at noon, despite a 7 percent drop in trading revenue.