Big Banks: Trading Revenue Losers

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser among large-cap U.S. banks on Monday, with shares sliding 3.4% to close at $27.22.

The KBW Bank Index ( I:BKX) was down 1.6% to close at 62.56, with all but one of the 24 index components ending with declines.

Shares of Citigroup ( C) were down 3.2% to close at $49.57. Index components ending with losses of over 2.5% included BB&T ( BBT) of Winston-Salem, N.C., closing at $34.19, and JPMorgan Chase ( JPM) which closed at $51.46.

The Financial Times on Sunday reported that Citigroup "has suffered a significant decline in trading revenues that threatens to depress its earnings," citing unnamed sources.

Investors are expecting a rough third quarter earnings season for several of the largest U.S. banks, with very large declines in mortgage lending revenue being signaled or preannounced by many, as refinancing volume drops. The largest banks are also expected to see a major decline in trading revenue.

"July and August were very slow months as investors sat on the sidelines waiting for more clarity on Fed tapering, Syria and the EM slowdown and we believe the weakness has extended into September," Atlantic Equities analyst Richard State wrote in a note to clients Monday morning.

Staite on Monday estimated the eight large-cap U.S. banks covered by his firm would as a group see a 20% year-over-year decline in third-quarter fixed-income trading revenue. The analyst cut his third-quarter earnings estimate for Morgan Stanley by 25% to 38 cents a share from 50 cents.

Staite also cut his third-quarter EPS estimate for Citigroup by 14% to $1.05 from $1.22, while lowering his third-quarter EPS estimate for Goldman Sachs ( GS) by 18% to $2.47 from $3.00. The analyst had previously cut his third-quarter EPS estimate for JPMorgan Chase by 14% to $1.25.

Shares of Goldman Sachs were down 2.7% to close at $165.25.

Fed Officials Shake Market

The broad indices all declined after two presidents of regional Federal Reserve banks made comments that could only have caused more confusion among investors over the timing of the central bank's expected change in monetary stimulus policy.

The Federal Open Market Committee last Wednesday decided not to reduce the purchases of long-term bonds by the central bank, which have been running at a net rate of $85 billion a month since last September. Federal Reserve chairman Ben Bernanke said after the decision that "we could move later this year" to temper bond purchases.

Then Federal Reserve Bank of St. Louis President James Bullard said Friday during an interview on Bloomberg TV that the tapering of the "QE3" balance sheet expansion by the Fed could take place as soon as next month.

On Monday, Federal Reserve Bank of Atlanta president Dennis Lockhart -- an alternate member of the FOMC -- said during a speech in New York that there was "some evidence to the affirmative" that the U.S. is "losing its economic mojo," which would certainly run counter to Bullard's comment about a possible tapering of Federal Reserve bond purchases next month.

Also on Monday, Federal Reserve Bank of New York President William Dudley -- a voting member of the FOMC -- said during a speech that "our actions are data dependent and how the data will evolve is uncertain."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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