Breakingviews: Markets dump coal in U.S. banks’ stockings

The fall in U.S. equity markets at the end of last year was a flesh wound. It still left a sizeable scar on banks that make money from trading securities.

At JPMorgan, an 18 percent drop in fixed-income revenue for the last three months of the year was the chief reason the bank missed analysts’ earnings estimates – a rarity for boss Jamie Dimon. As the S&P 500 Index plunged more than 15 percent in the space of three weeks, clients apparently sat on their hands. Rival Citi had already revealed a 21 percent fall in the part of its business that trades bonds and currencies.

Markets-based revenue comes and goes, but peep behind the numbers and the drop looks particularly brutal. Dimon told investors on Dec. 4 that he thought trading revenue would be “roughly equivalent to last year.” Citi’s finance director, John Gerspach, said the next day that he thought fixed income “may” be down.

Take them at their word and the impact of December comes into focus. JPMorgan’s quarterly trading revenue of $3.3 billion was some $431 million less than it would have been if his prediction had been correct. Assume one-quarter of the three-month period’s trading revenue typically comes in the normally quiet month of December. That would mean that Dimon expected to make just over $940 million that month – and actually got barely half that.

Citi’s numbers tell a similar story. If Gerspach was expecting, say, a 5 percent decline in the previous year’s $2.5 billion fixed-income revenue rather than the 21 percent he got, it means the size of Citi’s disappointment was just under $400 million. That’s also around half of the revenue the bank would have generated if trading activity hadn’t plunged in December.

In some ways it’s worse for Dimon because the surprise was so unusual. This is only the second time in two years the bank missed earnings estimates, according to Refinitiv data. At nearly 11 times forward earnings, his shares trade at a 40 percent premium to Citi’s. Investors have short memories when it comes to trading revenue, but the quantum of December’s moves, and the idea that they might become more regular, will put that to the test.

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