U.S. banks ben­e­fit from post­elec­tion trad­ing surge

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS WEEKEND - CHRISTINA PEL­LE­GRINI JAMES BRAD­SHAW

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.”

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