U.S. banks benefit from postelection trading surge
Robust gains in fixed income trading revenue at JPMorgan Chase & Co. and Bank of America Corp. are an early sign that a surge in activity after the U.S. election was felt across bond markets. And those strong fourthquarter results are buttressing expectations that Canadian banks also benefited from that trend.
U.S. banks were expected to handle more trading orders during the three months that ended Dec. 31, as their clients adjusted their portfolios after Donald Trump’s surprise victory in November triggered a selloff of U.S. government bonds.
Results from U.S. banks, which kicked off their latest reporting season on Friday, could offer clues about what investors might expect when Canadian banks report first-quarter earnings starting in late February. JPMorgan and B of A recorded double-digit gains in fixed-income trading during the final quarter of 2016.
Canadian bankers, meanwhile, have previously said they also reaped the benefits of a surge in trading toward the end of last year. But because the Canadian banks’ fiscal years end on Oct. 31, much of the impact has yet to be disclosed to investors.
“The expectations had been out of the U.S. that this was going to be a strong FICC [fixed income, currencies and commodities] quarter, and commentary had been that that should continue through into 2017,” John Aiken, an analyst at Barclays Capital Inc., said in an interview.
JP Morgan, the largest U.S. bank by assets, said revenue for its fixed-income markets group jumped 31 per cent to $3.4-billion (U.S.) compared with its fourth quarter in 2015. B of A said sales and trading revenue from FICC jumped 12 per cent from the prior year, to $2-billion. Even so, B of A fell short of analysts’ estimates. Chief financial officer Paul Donofrio said its trading segment didn’t perform as well as they thought it would because “the market tapered off” in December.
In fiscal 2016, the biggest six Canadian banks saw their revenue from trading fixed-income products surge 26 per cent to $7.3-billion (Canadian), according to Bloomberg. While FICC trading grabbed the spotlight in the fourth quarter, it remains to be seen whether they can build on these results this year.
“The question from my standpoint becomes: have the Canadian banks hit a limit, or will they also benefit from this?” Mr. Aiken added.
Results from some U.S. banks also offered limited insight into the outlook for the Canadian banks’ retail operations south of the border.
Net-interest margins – the spread between the rate at which a bank borrows and the rate at which it lends to clients – could be helped by rising rates. The U.S. Federal Reserve’s December rate hike came too late to move the needle substantially in the U.S. banks’ fourth quarter, but there is optimism for the coming months. And that could translate, if not directly, to stronger results for Canadian banks.
At Wells Fargo & Co., which also reported earnings Friday, net-interest margin rose to 2.87 per cent in the fourth quarter, up from 2.82 per cent in the previous three months, but still lower than a year ago. At B of A, the same metric was flat from the prior quarter at 2.23 per cent.
“We expect to see a significant increase in net-interest income in the first quarter of 2017,” Mr. Donofrio said.
The next round of Canadian bank results will include reporting from November through the end of January, affording them more time to benefit from the December hike. The biggest beneficiaries would likely be Bank of Montreal and Toronto-Dominion Bank, Mr. Aiken said. But he stressed that “the direct lateral would only be on their U.S. operations which, while they’re important, they’re a small fraction relative to the total.”