Wall Street’s New Year’s hangover carried throughout most of the first quarter, and now investment banks are looking at ugly earnings results after volatility stalled dealmaking to begin 2016.
Accordingly, earnings projections across big banks have been dialed back. Each of the major Wall Street banks are facing lower estimates for the first quarter of 2016 than what they reported the prior year. Goldman Sachs‘ consensus estimates are for earnings of $3.49 a share; Morgan Stanley‘s is 65 cents a share; and JPMorgan Chase is $1.27 a share.
Global investment banking businesses suffered the slowest first quarter since 2009, according to financial services data firm Dealogic. The nearly $750 billion in global mergers and acquisitions represented a volume plunge of 20 percent year over year, Dealogic reported Monday. Banking revenue was hit by a combination of a slow start to the year’s M&A, weak high-yield debt issuance and lingering weakness in banks’ trading operations, analysts said.
To make matters worse, trading desk revenue has been shrinking at many top banks. Last year, Morgan Stanley revealed plans to reduce head count in its fixed income, currency and commodities trading operation as part of a broader plan to streamline operations and generate savings. Though the bank’s stock has rebounded from early February lows, the shares are still down about 20 percent on the year. Morgan Stanley representatives declined to comment.
“We’ve seen material cutbacks in staff for fixed income,” said Kenneth Leon, global research director with S&P Global Market Intelligence. “This appears to be more secular than cyclical.”
All banks — not just investment banks — are facing headwinds coming from their exposure to energy loans. Most Wall Street banks decided not to announce loan loss reserves in advance of earnings. It may have been a smart move for banks that abstained from providing updates, as commodity prices rebounded late in the quarter.
Many on Wall Street expected other banks to follow suit after JPMorgan revealed in late February that it would fortify balance sheet reserves further with $600 million more to offset losses on energy companies. The bank declined to comment when contacted by CNBC.com
“Energy prices have come back a little,” said James Sinegal, Morningstar equity analyst for banking and payments.
For most Wall Street banks, reserves of “several hundred million is in the right ballpark,” Sinegal said. However, credit quality varies on a bank-by-bank basis. Now, it’s expected most banks will have to increase reserves.
“Wells Fargo‘s exposure might be riskier,” Sinegal added, because the bank is primarily exposed to exploration and production companies, a subsector that has been among the hardest hit in the energy space.
There are still silver linings for U.S. investment banks that got a slow start to the year. One, Leon said, could come from European banks scaling back their presence in North America as they face liquidity pressures and regulatory challenges at home.
European institutions including Credit Suisse fell down Dealogic’s rankings for banks’ share of announced U.S. deals in the first quarter. Credit Suisse and Wells Fargo declined to comment.
“The market leaders like Goldman Sachs should see share increase,” Leon said.
Dealogic data showed Goldman leading the pack for the greatest share of announced U.S. deals, while JPMorgan topped its M&A revenue rankings for the quarter. An upside surprise for Goldman at earnings in mid-April would be a welcome victory for the bank, which has seen its stock fall by about 12 percent so far this year.