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Trading Could Decline Marginally in 2Q18 as Volatility Subsides

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Volatility to subside

Equity-backed activity increased substantially in 1Q18, resulting in an industry-wide spike in trading income. Volatility declined in April, and it’s expected to remain marginally subdued in debt and equity products.

Hence, we can expect a sequential decline in trading income for banks. Higher volatility, major policy tweaks, trade wars, and expectations of rising rates have led to a major shuffling in portfolios across product offerings.

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Fixed income patterns

Asset managers witnessed withdrawals from debt offerings in 1Q18, resulting in lower fixed income sales and trading and partially offset by higher activity in currencies and commodities. Bank of America (BAC) posted net income of $1.5 billion in the Global Markets segment in the quarter. The segment saw a 2% rise in revenue to $4.8 billion aided by sales and trading activity.

Goldman Sachs (GS) and Morgan Stanley (MS) will see a higher impact in 2Q18 than other major commercial bankers (XLF) such as JPMorgan Chase (JPM) and Citigroup (C).

Trading assets

Bank of America continues to deploy funds toward improving technology-backed offerings in order to garner better penetration and operating efficiency. The bank’s Global Markets segment saw its total assets rise $71 billion to $678.4 billion in 1Q18 aided by growth across equities and other product offerings.

Overall, the segment’s efficiency ratio stood at 59%, in line with the previous year’s quarter. The segment saw its non-interest expenses rise 2% to $2.8 billion, largely due to investments in technology. It generated a return on capital of 17% compared to 15% in the previous year’s quarter aided by higher revenue, lower taxes, and continued efficiency.

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