Equities trading stings Wall Street banks as investors embrace bonds

Equities trading stings Wall Street banks as investors embrace bonds

REUTERS: In a reversal of fortune for Wall Street banks that have invested heavily in equities trading, clients flocked back to bonds last quarter and left stocks behind.In earnings reports over the past several days, Bank of America and Citigroup saw massive slides in equities trading revenue, while Goldman Sachs Group Inc and JPMorgan Chase Co posted small increases.The downturn appears to be a short-term blip related to market conditions and is unlikely to affect business strategies, analysts said. Banks have invested in equities trading, even though it has relatively slim profit margins, because new capital requirements are generally more lenient on equity products than bond products.Still, in an environment where banks are under enormous pressure to make sure every dollar invested produces a return, the meager results in equities trading were notable. Analysts said they would be closely watching performance in the quarters ahead.”While there are some concerns about potential to drive continued and sustainable growth in equities, the business is quite a bit friendlier in the new regulatory order,” said Nomura analyst Steven Chubak.From 2010 to 2015, equities-trading revenue rose 23 percent across the industry while bond trading fell 36 percent, according to research firm Coalition. Equities includes revenue from trading stocks and related derivatives, as well as prime brokerage services.Bank executives attributed the recent decline to worries about the U.S. election, Britain’s vote to leave the European Union, and the timing of a rate hike from the Federal Reserve. Stocks are viewed as riskier than bonds, and investors tend to shy away from risk when markets are full of uncertainty.Equities trading was lower simply because of the “natural cyclicality” of markets, said Ana Arsov, a bank analyst at Moody’s Investors Service. She noted that there was little volatility in stock markets last quarter, which meant investors had less reason to trade.In discussing the decline in equities trading, Bank of America Chief Financial Officer Paul Donofrio also highlighted gains in bond trading, arguing that the two businesses can help offset each other’s pain when times are tough.”You could see gains one quarter in one place and see something lower in another place, and that’s okay with us,” he said.Among the big Wall Street banks, Citigroup may have the most at stake.Management has said that the bank aims to rank fifth or sixth globally in…

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