Wall Street is facing a gloomy reality
First-quarter revenues boomed, ginning up hopes that a moribund 2016 was the end of a steady, four-year decline for banking.
The scorecard: $42 billion in first-quarter revenues at the top-12 banks, including $21.4 billion from fixed income trading - a 14% and 20% increase, respectively, according to data from industry consultant Coalition.
But high hopes have since been reined back in.
At an investor's conference on Monday, Citigroup CFO John Gerspach said the bank was on pace for a 15% year-over-year decline in trading revenues for the third quarter. A Barclays analyst estimated that all of Wall Street would see a 12% trading decline.
While the quarter still has to play out, a 12% decline across the Street would put third-quarter trading revenues at $27.2 billion, $3.3 billion less than the $30.9 billion the top-12 banks earned in the quarter last year, according to Coalition data.
The dismal projections - which follow a weak second-quarter - indicate the industry malaise may be no closer to its end.
Though deals activity has surged this year, it's unlikely to overcome the drop in trading, which accounts for a much larger share of revenue.
Here's a rundown of the troubling state of Wall Street in 2017 thus far:
- After a strong first quarter, business on Wall Street regressed in the second. Revenues dropped 5% from 2016 to $39.5 billion, including a 10% drop in trading.
- For the first half overall, Wall Street was up 4%, thanks to a 19% increase in investment banking deal activity.
- Strong investment banking performance won't be enough to overcome weak trading. Even assuming that investment banking continues to track 19% ahead of last year, Wall Street would end the third quarter about even with 2016, given the trading projections from Citi and Barclays:
- Investment banking revenues for the third quarter, assuming a 19% gain: $11.4 billion.
- Trading revenues for the third quarter, assuming a 12% decline: $27.2 billion.
- Total: $38.6 billion
- That's 4.5% below the $40.4 billion Wall Street hauled in during the third quarter in 2016. Through three quarters, it puts the banks basically even with last year: $120.6 billion in 2017 compared with $119.6 in 2016.
The blame for the decline in trading has largely been ascribed to record-low market volatility. 2017 just hasn't had the surprising whipsaw market moments that 2016 did, such as Brexit and the election of President Donald Trump.
That could change in an instant, and banks could see a trading resurgence in the latter half of the year.
But if the trend from the second and third quarters carries over to the fourth, that strong first quarter will be remembered as an outlier, and banks will be hurtling toward a fifth consecutive down year.