Breakingviews: U.S. banks are heading deeper into earnings mire

The pressure is starting to bear on Wall Street bosses. All in, earnings at the country’s biggest banks may fall 1.2% in the three months to the end of September compared to the same period last year, according to Refinitiv data. If so, it’ll be the first drop in three years. It’s not a blip.

Equity capital markets are at a seven-year issuance low globally, Refinitiv data show. Blame poorly performing initial public offerings like Uber Technologies, Lyft and Peloton Interactive and the debacle at WeWork. Lower-fee convertible bonds now account for the highest share of ECM issuance since the financial crisis.

Announced M&A deals so far this year are down by a tenth, and by 28% since the end of June. That left last quarter’s number of unveiled transactions at a five-year low and augurs falling fees over the next few quarters.

Recent rate cuts by the Federal Reserve will take a few months to flow through the system, too, pushing down interest income everywhere from consumer and commercial banking to wealth management.

That’s likely to subdue trading, which already looked flat in mid-September when the likes of Citigroup finance chief Mark Mason last publicly discussed it. Ensuing U.S. repo-market problems and the attendant spike in volatility may have created opportunities, but that doesn’t necessarily translate into higher profit. After repo rates jumped last December, for example, JPMorgan’s annual revenue from lending in that market rose some 64% to $3.8 billion. But the bank run by Jamie Dimon was also a bigger borrower, meaning its net repo revenue grew by just $37 million.

Bank executives talk a good game. At an investor event last month Morgan Stanley Chief Financial Officer Jonathan Pruzan insisted three times in quick succession that deal pipelines are “healthy.” Throw in continued uncertainty over Brexit, President Donald Trump’s trade wars and the outcome of next year’s U.S. elections, as well as growing fears of a U.S. recession, and the prospects for an uptick in business look low.

Shares in the top-five U.S. banks have already dropped as much as 10% from their summer highs. That’s probably just the start of the pain.