Will This Trend Weigh on Bank Profits Again This Quarter?

Banks with Wall Street operations turned in pretty good second-quarter results, but there was one area that lagged behind: trading revenues.

All five of the nation's biggest banks with large trading operations saw their bread-and-butter bond trading units lag the year-ago period. Goldman Sachs (GS 1.79%) led the way with a 40% drop, followed by JPMorgan Chase's (JPM 0.06%) 19% decline in fixed-income trading.

As you can see in the table below, Bank of America (BAC -0.21%), Citigroup (C 1.41%), and Morgan Stanley (MS 0.29%) were in the same boat, though to less of a degree. And now, according to recent statements from Goldman Sachs' chief financial officer, Marty Chavez, there's reason to believe that this trend is continuing in the third quarter.

Data source: Second-quarter earnings releases.

Chavez told bond investors on Tuesday that the fixed-income market had not improved much since last quarter, said Reuters. The low volatility that caused trading revenues to lag in the three months ended June 30, has "essentially continued into this quarter," noted Chavez.

Trading revenues tend to oscillate widely, dictated by market volatility and volumes. Over the last few quarters, however, volatility has been especially placid, particularly in the stock market, as evidenced by the fear index, the VIX, continuing to hover at near-record lows.

VIX data by YCharts.

Generally speaking, this will weigh most heavily on investment banks such as Goldman Sachs and Morgan Stanley, which derive a large share of their top line from commissions earned on the sale and purchase of securities to and from institutional investors.

That said, all things considered, Morgan Stanley turned in a relatively solid performance in terms of fixed-income trading last quarter, reporting a drop of only 4%.

As its CFO, Jonathan Pruzan, noted on the bank's second-quarter conference call:

Our sales and trading performance was solid, the post-election excitement that began to slow toward the end of the first quarter did not reassert itself for most of the second quarter predominantly impacting our fixed income franchise.

However, activities saw a notable uptick toward the end of the period as rates fell off. This contributed to our overall performance and underscores the strength and resilience of our franchise.

Image source: Getty Images.

Meanwhile, while trading results also play into the performance of universal banks such as JPMorgan Chase, Bank of America, and Citigroup, the impact is diluted by the revenue that these banks also earn from their commercial banking operations.

Either way, this is a topic that's worth following over the next two months if you have an interest in bank stocks. As the quarter progresses, there's bound to be more commentary around this issue, which will offer a clearer view of what bank investors should expect.