Banks Provide Q2 View as Capital Markets Business Normalizes

Yesterday, at the Morgan Stanley US Financials Conference, JPMorgan JPM, State Street STT and Morgan Stanley MS provided guidance for the second quarter of 2021. The chief financial officers (CFOs) of Wells Fargo WFC and Citigroup C are scheduled to present at the conference later today.

Starting with the country’s largest bank, JPMorgan has signaled an end to the pandemic-era trading boom. The company’s CEO Jamie Dimon projected a 38% year-over-year plunge in trading revenues in the second quarter. Specifically, he stated that the quarter will be “more normal” for trading business, with revenues coming in at “something a little bit north of $6 billion, which is still pretty good, by the way.”

In 2020, the company generated more than $29 billion in markets revenues, driven largely by stimulus packages, intervention from the Federal Reserve and heightened volatility.

Further, Dimon lowered the company’s projection for net interest income (NII). The bank now expects NII to be $52.5 billion this year, down from a previous expectation of $55 billion. Yet, the company is sitting on a huge stockpile of cash worth approximately $500 billion, thereby putting it in a strong position to benefit from higher rates.

Dimon expects rising inflation to result in higher interest rates over the next nine months. He further noted that “I think you're also going to have a very, very strong economy.” This will benefit the retail banking operation.

On the other hand, JPMorgan’s investment banking (IB) revenues are anticipated to be up in the second quarter backed by active M&A market as well as solid client activity in equities and debt capital markets. Dimon noted that the quarter “could be one of the best quarters you’ve ever seen” for IB business. He said, “I would just use a number like up 20% from both prior year and prior quarter. It could be 15% to 20%.”

Now coming to one of the major investment banks, Morgan Stanley’s CEO warned that IB revenues are not going to anywhere near the “gangbusters” level as recorded in first-quarter 2021. Nonetheless, IB revenues are expected to be still better than what it was in the pre-pandemic times. Notably, while fixed income unit has been generating revenues of almost $3 billion over the past couple of quarters, it is projected to witness revenues that will be well above the $1 billion target set by the company for the unit.

Following the downbeat guidance, shares of major banks including JPMorgan, Citigroup, Wells Fargo, Bank of America BAC, Morgan Stanley and Goldman Sachs GS were down more than 1% on Monday. However, State Street ended the day in green, with the company’s shares rallying 1.3%.

At the conference, the company CFO Eric Aboaf provided upbeat second-quarter outlook for fee income. Driven by better-than-expected equity market appreciation during the quarter, the company’s total fee revenues are now projected to rise 4-5% year over year, up from prior growth expectation of 2-3%. This includes nearly 10% growth in servicing fees, which was previously guided 7-8% up.

Further, Aboaf reiterated NII to be in the range of $460-$465 million, while expenses are expected to jump 3% year over year (up from prior guidance of 2.5% rise).

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