Brexit expected to bite profit for years at US banks
NEW YORK: When US banks post second-quarter results in days, it’ll boil down to this: Bonus cuts are coming for just about everyone this year, says Wall Street recruiter Richard Lipstein. “If you are break-even, it’s an achievement.” That’s the picture taking shape as analysts trim estimates for the quarter and overhaul longterm projections for banks’ main businesses after the UK’s vote to leave the European Union.
Starting this week, JPMorgan Chase, Citigroup and Goldman Sachs Group probably will say they saw a quick bump in trading after the June 23 referendum, but that deals are stalling and years of pain lie ahead.
Combined net income at the six biggest US banks is estimated to fall 18 per cent in the second quarter from a year earlier, according to analysts surveyed by Bloomberg. Fred Cannon, global research director at Keefe, Bruyette & Woods, said many analysts are just starting to rework projections for future periods to account for Brexit’s fallout, such as the prolonging of low interest rates.
“We went from lower for longer into what seems like lower forever,” he said.
That will erode interest from lending. Market turmoil and economic drags linked to Brexit will hurt investment banking revenue as companies reconsider acquisitions and selling new securities. And that’s after trading units suf- fered their worst first quarter since 2009.
Partially recover
For the full year, analysts predict combined earnings at the six US banks — which also include Bank of America, Wells Fargo and Morgan Stanley — will drop 14 per cent. It may only partially recover in 2017, the estimates show. The projections for both years tumbled after markets swung earlier this year, and then slipped further after the UK vote as analysts began updating research.
“Up until June 24, everybody thought the second quarter was building a nice recovery, and now you have to question that,” said Chris Kotowski, a bank analyst at Oppenheimer, referencing the day ballots were tallied. “I’m more cautious than I was.”
He cut full-year estimates for the six banks’ earnings per share by an average of 8 percentage points after the UK vote. Stock offerings will “slow significantly,” corporate acquisitions will “grind to a halt,” and fixed-income trading will cool again, he said. Any Federal Reserve interest rate increases are off the table indefinitely, thwarting the long-awaited improvement in interest income. Altogether, that probably will result in another bite out of yearend bonuses, Kotowski said.
Three weeks before the referendum, executives across Wall Street were busy trumpeting a re- surgence in revenue from trading. At JPMorgan, it was expectations for a “mid-teens” percentage increase in the second quarter. Bank of America said it was on track to rise “mid-single digits.” Citigroup also signaled improvement from a year earlier. Jamie Dimon, chief executive officer of JPMorgan, the biggest trader of fixed-income securities, said on the day UK voting results were announced that currency-trading volumes had just reached a record.
While some analysts suggest banks probably focused on handling the surge in client orders without risking their own money, others are cautioning against putting too much weight on the early optimism.