Low volatility and trade volumes depressed 1H14 results for most investment banks, and while year-on-year comparisons will get easier in the fourth quarter Jefferies Analyst Ken Usdin sees continued difficulties for most of the big nine investment banks for the rest of this quarter.
“QTD metrics, as well as mgmt. commentary thru the first weeks of 3Q, suggest that fixed income and equity trading volumes and volatility remain relatively muted absent some specific high volatility days (usually around Fed-watching or political news),” writes Usdin.
Investment Banks: Equity and FICC trade volumes likely to keep dropping
Equity trading revenues fell 6% quarter-on-quarter and 10% year-on-year in 2Q, and they are probably going to have a tough 3Q as well. US equity volumes have fallen more sharply than European volumes, although both look like they could gain over 3Q13. Usdin is modeling low single-digit sequential and annual drops in equity trading revenues for Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) (the universal banks that he covers) this quarter.
Fixed income (FICC) trading revenues fell 19% quarter-on-quarter and 6% year-on-year in the second quarter, and volumes of corporate and US government bonds is ticking down even further, with agency volumes being the one big exception.
Even though overall trade volume has remained low, one bright spot is that high share prices have continued to fuel IPOs and M&A deals, and Usdin says there are plenty of more deals in the pipeline, giving investment banking revenues some support. Debt capital market revenues could also get a boost in the next few quarters as corporations try to lock in low interest rates before the Fed hikes its rates.
BAC, C, JPM still have attractive valuations: Usdin
Even though all three face challenging trading environments, Usdin continues to like Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) because their current valuations seem to reflect problems with last year’s stress tests, legal troubles, and negative EPS revisions that are all being sorted out to some extent. Even with the large banks outperforming regional banks so far this quarter, the group is still trading at less than 10x his 2015 EPS estimates. While he favors BAC and JPM over C, Usdin thinks all three could be solid long-term investments.
