With second-quarter bank earnings in the rear-view mirror, it's time for investors to start looking ahead to October, when they will report third-quarter earnings.
This is especially true for those who are shareholders in large universal banks like JPMorgan Chase (NYSE:JPM), which could see their revenues and earnings suffer from another quarter of lagging trading results.
With this in mind, it's worth examining how much of the New York City-based bank's revenue and earnings come from the purchase and sale of securities to institutional investors.
Q2 trading results
All things considered, the nation's biggest banks turned in solid performances last quarter. But there was one area where they stumbled: trading revenues.
Low market volatility and volumes through the three months that ended June 30 meant that those banks, which earn significant sums of money trading securities for clients, saw their performances slightly lag as a result.
JPMorgan specifically reported a 19% year-over-year decline in income from bond trading, its most lucrative type. Income from equities trading was also down in the quarter, but by only 1%.
That translated to an approximately $750 million drop in revenue at the $2.6 trillion bank.
As JPMorgan Chase CFO Marianne Lake noted on the quarterly earnings call:
Total [markets-related] revenue was $4.8 billion, down 14% year-on-year. Fixed income revenue was down 19% with decent performance across products relative to a very strong second quarter last year, which was driven by higher levels of volatility and activity broadly, including as a result of Brexit. This quarter conversely can be characterized by a lack of idiosyncratic events, resulting in sustained low volatility, reduced flows and continued credit spreads tightening, all of which impacted activity levels in rates, credit rating and commodities.
Thus far in Q3, there's no indication that trading revenues have rebounded. In fact, there's reason to believe that the quarter could be similarly disappointing in this regard.
On a conference call with bond investors this week, Goldman Sachs (NYSE:GS) CFO Marty Chavez said that activity in the fixed-income markets had not improved much since last quarter. The low volatility that caused trading revenues to lag then has "essentially continued into this quarter," he said.
If this pattern holds through the rest of the quarter, that will be bad news for Goldman Sachs in particular, which saw its fixed-income trading revenues fall 40% in Q2 compared to the year-ago period.
It would also be bad news for JPMorgan Chase. While its business model is more diversified than Goldman Sachs', it nevertheless generates revenues of between $4.8 billion and $5.8 billion from trading each quarter. That amounts to between 19% and 24% of its top line -- a sizable chunk of change any way you look at it.