Higher valuations and stable earnings expectations—alongside major reforms like a reduction in tax rates—allowed funds and institutions to hold onto equities and other offerings throughout the last few months of 2017. So broad markets saw lower volatility, resulting in lower trading income for major banks (XLF). Goldman Sachs (GS), considered a major player, saw a steep decline in trading income for 2H17. Bank of America (BAC) and Citigroup (C) managed lower declines on a deployment of technology, penetration, and diversified offerings.
Four rate hikes
In 1Q18, markets have seen a bumpy ride with a decline in valuations for equities, largely due to four rate hike expectations instead of three in the current year. Due to hawkish policy, debt offerings have also witnessed higher withdrawals by institutions. However, a short-term volatility spike is expected to boost trading income for Bank of America and J.P. Morgan (JPM).
In 4Q17, Bank of America’s Global Markets segment managed revenues of $3.4 billion, a decline of $78 million on a YoY basis. The decline was mainly due to weak sales and trading revenues, partially offset by gains on the sale of non-core assets. The segment’s net income fell 38%, mainly due to higher spending on technology and higher provisions due to select clients. The segment’s spending rose by $131 million, largely due to technology, partially offset by lower incentives.
Fixed income has suffered a bigger decline in 4Q17, compared to equity trading activity, reflecting an expectation of a continued rise in stock markets. Bank of America’s trading assets increased to $450 billion in 4Q17 from $417 billion in the prior year on higher contributions and valuation. RoE on trading has declined across the sector due to continued spending and weaker revenues. The trend is expected to change in the first half of 2018.