Wall Street banks are looking at a “new normal” for trading revenues after a fantastic two years

A street sign, Wall Street, is seen outside the New York Stock Exchange (NYSE) in New York City, New York, USA, January 3, 2019. REUTERS / Shannon Stapleton / File Photo

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NEW YORK, Jan. 19 (Reuters) – Wall Street banks expect trading revenues to settle to a “new normal” somewhere between pre-pandemic levels and the heights of the past two years, top executives and analysts say.

A massive inflow of cash to the capital markets from the Federal Reserve led to unparalleled liquidity and trading activity through the pandemic as investors sought opportunities to make money. But trading revenues at leading Wall Street banks fell in the fourth quarter as markets normalized and the Fed scaled back its asset purchases. read more

Banks with large trading desks such as Goldman Sachs (GS.N), JPMorgan (JPM.N) and Morgan Stanley (MS.N) have been the biggest beneficiaries of market volatility, which has enabled traders to enjoy their best period since 2007. -09 financial crisis.

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Now they are faced with the realization that the favorable market backdrop will not last forever.

“None of us could have foreseen the environment we have lived through the last two years and especially the environment this year, which was obviously a significant tailwind for our business,” Goldman Sachs CEO David Solomon told analysts after the bank published Tuesday earnings that were lower than market forecasts. read more

“We in no way see it as a permanent environment that will continue at this pace,” Solomon said.

He added that the bank continued to see “reasonable” activity in 2022, and that the business could thrive regardless of market conditions.

Leaders of rival JPMorgan Chase & Co (JPM.N) struck a similar tone last Friday after the country’s largest bank posted results that disappointed. read more

“In our key case, markets and banks normalized somewhat in 2022 compared to their respective record years of 2020 and 2021 and resume modest growth thereafter,” CFO Jeremy Barnum told analysts.

Barnum said that trading volumes will remain high in 2022.

“The beginning of an interest rate hike cycle can be quite healthy for interest income in particular,” he said.

Analysts also expect the general environment to remain positive for trading activity, albeit below levels over the past two years.

“Children from 2020 and 2021 are quite tall,” said Devin Ryan, an analyst at JMP Securities, part of Citizens Financial Group. “We will probably see some normalization and the industry is trying to figure out what that normalization will look like.”

On Wednesday, Morgan Stanley said trading revenues fell 26% in the fourth quarter. While stock trading income rose by 13%, these gains were obliterated by a 31% decline in interest income, the bank said. read more

Leaders of Goldman Sachs, JPMorgan and Morgan Stanley have stressed their confidence in holding on to increases in market share achieved during the pandemic, partly as a result of European banks’ withdrawal.

Goldman, in particular, has focused on doing more trading on behalf of its largest corporate clients.

“It’s still upside for us from a wallet sharing perspective, when we look at the broad customer base,” Solomon said. “We want to take a more sustainable share from the opportunities the market provides.”

Most analysts believe the outlook for trading companies is better than people had anticipated.

“The outlook for trade is more optimistic,” said Kush Goel, a senior analyst at Neuberger Berman in New York. “It does not go back to 2019.”

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Reporting by Matt Scuffham in New York Editing by Matthew Lewis

Our standards: Thomson Reuters Trust Principles.

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