Daily Management Review

2016 could be a Troubled Year for US Banks due to a Dismal First Quarter


2016 could be a Troubled Year for US Banks due to a Dismal First Quarter
Analysts at Wall Street are of the view that since the financial crisis in 2007-2008, it has been the worst start to the year for US banks and predict poor first-quarter results after reporting begins this week.
The capital markets, and consequently loan growth, are weighed down by near-zero interest rates, concerns about economic growth in China and the impact of persistently low oil prices on the energy sector.
According to Thomson Reuters I/B/E/S data, analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks. Predictions are that some of the largest banks like Goldman Sachs Group Inc are expected to report the worst results in over ten years.
Since banks typically generate at least a third of their annual revenue during the first three months of the year, this spells trouble for the financial sector.
"What's concerning people is they're saying, 'Is this going to spill over into other quarters? If you do have a significant decline in revenues, there is a limit to how much you can cut costs to keep things in equilibrium '" Goldman's lead banking analyst Richard Ramsden said in an interview.
The earnings season would kick off with JPMorgan Chase & Co, the country's largest bank and investors will get some insight. This would be followed by results from the Bank of America Corp and Wells Fargo & Co, Citigroup Inc, and Morgan Stanley and Goldman Sachs Group Inc in the same week and the next.
While adapting to a panoply of new regulations that have raised the cost of doing business substantially, banks have been struggling to generate more revenue for years.
Heavy capital requirements, new derivatives rules, and restrictions on proprietary trading has made fixed-income trading less profitable and which is defined as the single biggest challenge for banks in the US resulting in shrinkage of business.
Bank executives have already warned investors to expect major declines across other areas as well.
Investors should expect trading revenue more broadly to drop 15 percent versus the first quarter of last year, Citigroup Inc CFO John Gerspach has said. A 25 percent decline in investment banking is expected by JPMorgan Chase & Co's Daniel Pinto. The declining quality of energy sector loans has also kept executives of several bank worried.
According to Thomson Reuters data, there was a 28 percent decline for the year-ago period in global investment banking fees for completed merger and acquisitions, and stock and bond underwriting which totaled $15.6 billion in the first quarter.
Trading volumes have been dry for most of the quarter due to volatility in stock prices and plunging commodities prices caused. The declines of the first two months of the year could not be offset by increase in trading volumes in March.  
Capital markets weakness may extend at least into the second quarter said Matt Burnell, a Wells Fargo banking analyst, in a research note.

"The first quarter is going to be ugly and we don't think that necessarily gets recovered in the back half of the year. There are a lot of challenges ahead," said Jerry Braakman, chief investment officer of First American Trust, which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman.