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Any Spike in Trading Activity Could Benefit Bank of America

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Trading activity decline

Over the last two quarters, trading activity has fallen for commercial and investment banks (XLF) due to the placement of funds by institutions in debt-related offerings and no major corrections. Low volatility and high valuation have been major causes of lower trading activity. However, any valuation decline or correction, reforms such as tax cuts, or interest rate hikes could bring back some volatility and buying opportunities at lower prices, stirring bulls and bears.

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Bank of America’s (BAC) global markets division saw its net income fall 30% to $756 million, mainly due to weakness in debt-related products and trading. Its revenue fell 11% to $3.9 billion in 3Q17. Recently, Goldman Sachs (GS) and Wells Fargo (WFC) have seen steep declines in trading, while Citigroup (C) has witnessed average declines.

Fixed income trails equity

Bank of America’s trading activity fell 15% to $3.2 billion, mainly due to a 22% fall in fixed income activity, and partially offset by a 2% rise in equity trading. Its assets managed under trading activity rose to $442.3 billion in 3Q17 from $415.4 billion in 3Q16, reflecting higher valuation and contributions.

Trading-wise, Bank of America has performed better than many peers, helped by its investments in technological solutions. The division’s spending rose by $54 million, supported by technological spending and partially offset by lower administrative costs. The division’s return on average allocated capital fell to 9.0% in 3Q17 from 10.0% in 2Q17, reflecting continued low volatility.

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