December 8, 2016 / 2:55 PM / 10 months ago

US election surge helps cap recovery year for trading

NEW YORK, Dec 8 (IFR) - US banks are on track to snap the downtrend in fixed income trading as JP Morgan, Citigroup and Bank of America said fourth quarter markets revenue could be up 15% to 20% from a year ago.

Citigroup chief financial officer John Gerspach said markets revenue was up 20% at the bank so far in the fourth quarter due to continued strength in rates and currencies.

“Coming out of the third quarter we had a lot of good client activity,” Gerspach said at an investor conference. Following the US election, client engagement stayed high and was fairly broad based, continuing a rise in trading momentum in the third quarter following Britain’s vote to exit the European Union.

Bank of America Merrill Lynch Chief Executive Brian Moynihan said markets revenue is up “around 15%-ish”.

And JP Morgan CEO Jamie Dimon said fourth-quarter markets revenue is running higher than a year earlier by “15%-plus.”

For JP Morgan the hurdle was easier to jump, as revenue from fixed income trading was down 3% in the fourth quarter of 2015 compared to 2014.

Still, with a strong finish, fixed income trading will end a multi-year funk this year.

FICC trading revenues are down 35% from their peak, and half of that decline is from structural changes to the market that will likely not be reversed, Dimon said. Half of the decline is from a deep cyclical downturn that may be over.

“We are entering a period of improved trading activity - especially relative to our previous expectations throughout 2016,” said Keefe, Bruyette & Woods analyst Brian Kleinhanzl.

“Trading activity has remained generally elevated since the US election and we believe interest rate normalization and the prospect of higher inflation in the US should support an increased level of FICC trading activity relative to prior years,” he said in a note.

KBW forecast FICC revenues will increase 0.7% next year and 3.5% in 2018 on average.

Both Citi and BAML expect fourth quarter investment banking revenue to be flat to down compared with the year ago quarter.

BAML is expecting investment banking revenue between US$1bn and US$1.2bn.

Citi said DCM activity is lower this quarter, which could be due to the rate environment, but stronger M&A fees could close the gap.

TURNING BACK DODD-FRANK

The surprise result of the US election did more for banks than goose up fourth quarter trading results. In the first week following the election of Donald Trump shares of the largest US banks rose more than 10% on the expectation the new administration would ease the regulatory burden.

While a full repeal of the 2010 Dodd-Frank financial reform act is not on the table, banks are expecting parts of the legislation will be reworked or eliminated, especially rules they say impede market marking.

Banks are not asking for Dodd-Frank to be thrown out wholesale, Dimon said.

“It has always been rational to look at major legislation and open it up, take a look at it, recalibrate it, change it a little bit,” he said.

Dimon was cautious about what he would like to see revised but did take aim at restrictions on market making that force banks to hold only securities they expect clients will want to trade or the reasonably expected near-term demand, known as RentD. It requires banks to keep evidence to prove the positions of a trading desk are tied to customer activity.

“The amount of record-keeper required to demonstrate that a bank is meeting the RentD analysis is over the top,” Gerspach said. It’s also administered by three different agencies, he said.

“It is a waste of time,” Dimon added. (Reporting by Philip Scipio; Editing by Steve Slater)

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