The short answer is that trading revenues at the nation’s leading financials (NYSE:XLF) have plummeted so far this year. Reuters reports that JP Morgan (NYSE:JPM) for one expects revenues from trading and sales to take a near 20% dip in the second quarter, “reflecting a slowdown in investor activity and the dismal performance of its fixed-income and commodities groups.” JPM may not be alone, with Credit Suisse (NYSE:CS) analysts expecting an average 25% drop-off in core trading revenue from Wall St. money machines Goldman-Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) too.
William Tanona of UBS (NYSE:UBS) explains, “We are undoubtedly being impacted by lower levels of activity. There is a lot of uncertainty out there.” Investors have become increasingly reluctant to trade due to the ongoing European debt crises, stalling negotiations over raising the US debt ceiling, uninspiring economic indicators in a slowing recovery, a worsening labor market, and an overall lack of faith in the future of the nation’s economic prospects (according to consumer confidence survey’s). Volatile commodity prices (energy-related in particular) also conspired to keep fixed income trading returns below average this quarter.
In addition to lower trading volumes and volatile commodities prices, a new slate of financial regulations including caps on debit card transaction fees, increased capital reserve requirements, and a dip in mortgages and new loans have also taken a hit on banks’ balance sheets. Financial leaders such as Morgan Stanley (NYSE:MS), Goldman-Sachs (NYSE:GS), and JP Morgan (NYSE:JPM) have responded with efforts to cut costs, including job layoffs and other initiatives to lower non compensation expenses. Legal settlements too have weighed on banks income, with Wall St. leaders perennially under fire this year from municipal, state, and federal law-makers due to their activities contributing to the financial crisis. Put it all together and we have the rationale for why this year’s second quarter may see one of the worst earnings seasons for bank stocks in recent memory.