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Banks to End 2019 With Upbeat Trading and IB Performance

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Banks are likely to end 2019 with a bang. At an industry conference earlier this week in New York, top banking executives signaled solid fourth-quarter trading and investment banking (IB) performance. However, low interest rates will be a major concern.

Solid Trading & IB to Aid Fee Income

After a challenging fourth-quarter 2018, banks’ performance is expected to be impressive this time.

At the conference, JPMorgan’s JPM CFO Jennifer Piepszak stated that trading revenues in the fourth quarter are expected to be up “meaningfully” year over year, with gains largely driven by the fixed income operation. In the year-ago quarter, the company’s fixed-income trading revenues were at the lowest levels since the financial crisis.

Further, the bank’s IB revenues are now projected to be flat on a year-over-year basis, up from the prior guidance of a decline. Piepszak said, “The quarter has played out a little bit better than we thought largely on healthy investment grade flow given the rate environment. Important to note there that the wallet is shrinking. So staying flat for us year-over-year is the continuation of us taking share in IB fees.”

Additionally, with a bit of improvement in the rate environment, net interest income (NII) during the quarter is projected to be nearly $14.2 billion, on par with the third-quarter level.

Likewise, Brian Moynihan — CEO at Bank of America (BAC - Free Report) — came up with upbeat guidance. He stated that the company’s trading revenues are likely to increase 7-8% year over year, while IB revenues are projected to rise 3-4%.

However, Citigroup’s C CFO Mark Mason expects IB revenues to be flat to slightly down from the prior-year quarter. He, further, stated “We expect to continue to take share,” though wallets are declining. Mason anticipates markets revenues to be up in the high teens. Operating expenses to be up on a year-over-year basis, while the same is likely to decline sequentially.

Further, Terry Dolan, U.S. Bancorp’s USB CFO reiterated the earlier projection of low-single-digits decline in NII on a year-over-year basis, while fee income is expected to be up in the mid-single-digits. Net interest margin (NIM) is expected to be down 2-3 basis points from the third quarter, mainly due to higher-than-expected premium amortization.

Further, he noted “…loan growth is pretty similar to what we've experienced in the last couple of quarters. It’s probably going to be a little bit softer in the corporate side of the equation because of loan pay-downs, given the lower interest rates.”

Our Take

After taking a look at the guidance provided by these major banks, it seems that fee income will likely offer some support to the top line in the fourth quarter. Though the yield curve has steepened during the quarter (compared with the third quarter), overall low interest rates will hurt both NII and NIM.

Nonetheless, with the Federal Reserve likely to keep the interest rates unchanged in 2020, banks are expected to benefit from rise in demand for loans, going forward. This along with strong domestic economy will continue to support banks’ financials despite several geopolitical concerns.

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