Weaker global markets, M&A slump to hit Wall Street bank profits

Wed Jul 3, 2013 9:21am EDT
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By Lauren Tara LaCapra

NEW YORK (Reuters) - The second quarter was likely tough for Wall Street bank profits as markets weakened globally and merger advisory revenue dropped, leading analysts to lower their profit estimates in recent days.

Trading revenue for the industry likely dropped 20 percent from the first quarter, as falling markets and lower trading volumes cut into the value of securities banks hold to trade with customers, said Richard Staite, analyst at Atlantic Equities in London. Staite expects trading revenue for the industry to have risen just 10 percent from last year's dismal quarter, when the European debt crisis hurt profits.

Second-quarter results are expected to underscore the challenges banks faced as bond yields began to rise. There is broad agreement on Wall Street that, in the long run, higher interest rates will help bank profits.

But in the second quarter, announced mergers and acquisitions volumes fell 8 percent from a year ago, according to Thomson Reuters data. The deal pipeline is now at the lowest level in almost 20 years, Credit Suisse analyst Howard Chen said in a recent report.

As rates are shifting, so are big banks' business models, exacerbating market stress. Higher capital standards and restrictions on trading for speculative profits under the Dodd-Frank financial reform law has led banks to reduce exposure to riskier assets, and cut the amount of time bonds can be held in trading inventory.

"The big banks have really kind of taken themselves out of the equation in certain markets because of Dodd-Frank and other regulations that have required them to pull their capital back," said Scott Colyer, chief executive officer and chief investment officer at Advisors Asset Management, which has $11 billion in assets. "There definitely is a lack of liquidity out there."

But as interest rates rise toward historical norms, more pain is expected for banks and investors alike.

Wall Street executives including Goldman Sachs Group Inc (GS.N: Quote) CEO Lloyd Blankfein and JPMorgan Chase & Co (JPM.N: Quote) CEO Jamie Dimon have been fretting about interest-rate movements for months.   Continued...