While equity trading last March trading was affected by the excess volatility arising from the Fukushima explosions a year earlier, and the Japan earthquake induced volatility in general, today's monthly volume update by the NYSE shows that no matter what the reason for the volume collapse, toplines for banks and traders will suffer, on both a Y/Y as well as sequential basis. Per the NYSE [18]: "European and U.S. Cash ADV Down 13% and 24% Year-over-Year.... NYSE Euronext European cash products ADV of 1.6 million transactions in March 2012 decreased 12.7% compared to March 2011, but increased 0.5% compared to February 2012. NYSE Euronext U.S. cash products handled ADV in March 2012 decreased 23.6% to 1.8 billion shares compared to March 2011 and decreased 0.6% from February 2012." An even bigger year-over-year collapse took place in the one product which everyone thinks is taking the place of individual stock trading: the synthetic CDOs known as ETFs: "NYSE Euronext U.S. matched exchange-traded funds ADV (included in volumes for Tape B and Tape C) of 222 million shares in March 2012 decreased 29.3% compared to March 2011, but increased 4.1% compared to February 2012. In the first quarter of 2012, NYSE Euronext U.S. matched exchange-traded funds ADV of 221 million shares was 21.8% below prior year levels." The YoY collapse in trading volumes for derivatives was less compared to cash, but the sequential drop from February 2012 was even more pronounced: "NYSE Euronext global derivatives ADV in March 2012 of 8.1 million contracts decreased 11.5% compared to March 2011 and decreased 15.4% from February 2012 levels." We can only hope that banks have found some innovative ways of compensating for this collapse in overall market participation, such as traditional revenue pathways like underwriting and advisory fees, as well as lending and arbing the carry trade. Alas, as the following Bloomberg piece points out [19], this will hardly be the case, as Zero Hedge has warned previously.
The six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., may post an 11 percent drop in first-quarter profit, threatening a rally that has pushed bank stocks 19 percent higher this year.
The banks will post $15.3 billion in net income when adjusted for one-time items, down from $17.3 billion in last year’s first quarter, according to a Bloomberg survey of analysts. Trading revenue at the biggest lenders is projected to fall 23 percent to $18.3 billion, according to Morgan Stanley analysts, who didn’t include their firm or Wells Fargo.
U.S. lenders, struggling to expand in commercial banking years after the housing collapse, haven’t matched last year’s overall results, even as bond and equity markets strengthened. Making matters worse, loan balances increased less than the economy, bucking a trend in previous recoveries, said Brian Foran, a New York-based analyst at Nomura Holdings Inc.
Equity-trading revenue may have fallen 34 percent to $4 billion and fees from underwriting equities may have dropped 18 percent to $1.15 billion over the prior year, according to the estimates. Revenue from mergers and acquisitions advice may have declined 30 percent.
Trading got a lift from rising asset prices with those banks bringing the largest inventories into the quarter likely doing the best, according to Charles Peabody, an analyst at Portales Partners LLC in New York. U.S. investment-grade and high-yield corporate debt rose 3 percent in the first quarter, according to Bank of America Merrill Lynch Index data.
“We’ve gotten more defensive in the last several weeks,” Peabody said in a phone interview. “Fee income will be pretty strong given fixed-income results and asset appreciation. By contrast, we think top-line and the basic banking business will be disappointing.”
Peabody said bank stocks could fall 20 percent to 30 percent from their recent highs.
Central bankers aren’t helping. Fed officials affirmed their projection, first announced in January, that subdued inflation and economic slack probably will warrant low rates through late 2014, according to minutes of the March policy meeting released this month. That cuts into net interest margins, the difference between what banks earn on loans and what they pay for funds. At the four largest U.S. banks by assets, margins dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.
And to think all of the top line gimmickry could have been avoided if retail linvestors still had some faith in the US capital markets. Alas, that time is now long gone.