Banks unlikely to party like its 2009

Trading profits at Goldman Sachs Group, Morgan Stanley and other major US banks may be recovering, but are still unlikely to match the blockbuster levels reached most of last year.

Wildly fluctuating prices across fixed income markets triggered high trading volume in 2009, generating big profits for banks and allowing Goldman to post record earnings just a year after the 2008 financial meltdown.

Although corporate and municipal bond trading remain important profit drivers, prices are fluctuating less, and the gap between where dealers can buy and sell securities have tightened in 2010, hampering profit at trading desks at major banks.

"Last year was a once-in-a-century kind of opportunity," said Fred Yosca, head of fixed income trading at BNY Mellon Capital Markets LLC in New York.

"To the extent that you capitalised on it, people expect you to do the same thing next year. Well, the opportunity isn't there."

Most corporate bond prices have risen relative to Treasuries, too, which should also hamper profitability in 2010, Yosca said.

Banks benefited in 2009 from cheap access to money from the Federal Reserve, but analysts are concerned that that access, which bolstered fixed income trading revenues, might soon be coming to an end.

"That will do a pretty good job on fixed income," said Brad Hintz, an analyst with Sanford C Bernstein.

Rochdale research analyst Richard Bove noticed that 2010 started with "a massive surge" across all markets, after trading had come to a "virtual halt" for six weeks in the fourth quarter as customers took profits and went away for the holidays.

Bove said he heard from one company that the early 2010 surge was so big that it accounted for 20 percent of all of the trading the firm had done in 2009.

But events later in January and February, including the woes facing Greece's economy and increased uncertainly about US financial regulations, slowed trading.

"The hope is in March things will turn around dramatically," Bove said.

Bove earlier this month cut his annual Goldman Sachs estimates, citing "disappointing" trading activity.

Analysts have also been lowering their forecasts for Morgan Stanley's earnings in recent weeks because of trading worries. StarMine's SmartEstimate, based on its assessment of the most accurate analysts, now has Morgan Stanley earnings falling 5.1 percent below Wall Street estimates for 2010.

Dramatic turnaround

The turnaround in 2009 was so dramatic that Goldman reported pretax trading revenue of US$17.3 billion, a year after the firm posted pretax trading losses of US$2.74 billion.

Goldman in 2009 had 131 days when it had more than US$100 million in net trading revenues. Its trading desks lost money on only 19 days the entire year.

But in the fourth quarter of 2009, Goldman's trading revenues fell 36 percent from the third quarter as falling debt trading volumes weighed on results.

Rivals such as Morgan Stanley and JPMorgan Chase & Co (JPM.N) also saw trading fall as 2009 came to a close.

For Goldman, nearly half of its revenue in its robust third quarter came from its fixed income, currency and commodities trading business.

Walter Todd, portfolio manager of Greenwood Capital, which manages US$785 million and owns Morgan Stanley shares and Goldman debt, is not quite ready to give up on Goldman's traders, given their track record of turning eye-popping profits.

"Never say never to those guys," Todd said. "They tend to make gold out of iron."

- Reuters