JPMorgan Chase (JPM) , Citigroup (C) and other U.S. banks, already reeling from a surge in oil-industry loan defaults, now face shrinking returns from trading and investment-banking as volatile markets push clients to the sidelines.
First-quarter trading revenue at the largest U.S. banks probably plunged by an average 25% from a year earlier, according to brokerage firm Keefe, Bruyette & Woods. Fees from advising on mergers and stock- and bond-underwriting likely tumbled 11%. JPMorgan, the biggest U.S. bank, is due to post results on April 13, with Bank of America (BAC) , Wells Fargo (WFC) , Citigroup, Morgan Stanley (MS) and Goldman Sachs (GS) reporting over the following week.
Markets have gyrated this year as investors agonized over China's currency stability, U.S. monetary policy and Japan's surprise decision to cut interest rates below zero. As a result, companies refrained from pursuing initial public offerings or selling debt during a period that is usually one of the strongest of the year, hitting Wall Street in its most profitable businesses.
"It was an ugly quarter," said Mike Mayo, a bank analyst at CLSA. "It almost seemed like there was nostalgia for the financial crisis."
Trading revenue probably slid 20% at JPMorgan, with 15% declines at both Citigroup and Bank of America, Deutsche Bank analyst Matt O'Connor estimated in a March 30 report.
Mortgage-bond turnover dropped by 9%, KBW analysts Brian Kleinhanzl and Christopher Mutascio wrote in an early April report.
In the few places where trading accelerated, the transactions were "predominantly in lower-margin products such as investment-grade corporate bonds and Treasuries," the analysts wrote. "The typical first-quarter seasonal strength will not come to fruition due to continued market turmoil."
The impact was particularly severe on Goldman Sachs, according to KBW, because of its relative lack of diversification into other business lines, such as consumer banking. KBW chopped its estimate for Goldman's first-quarter earnings by roughly half, to $2.79 a share.
The trading disappointment adds to pressures on banks that have mounted in recent months. Federal Reserve Chair Janet Yellen has suggested the U.S. central bank may be less aggressive than previously expected in raising interest rates, diminishing banks' ability to charge more for loans.
The Fed's monetary policy committee indicated after its March meeting that there will be only two hikes this year, taking the benchmark rate to between 0.75% and 1%, rather than the four previously predicted. In December, the bank raised rates by 25 basis points for the first time since cutting them to nearly zero during the financial crisis.
That may faze Wells Fargo, a holding in Jim Cramer's Action Alerts PLUS Charitable Trust portfolio, less than its peers. The San Francisco-based bank has "proven in the past that it is well-positioned to succeed in a lower rates environment, one of the reasons why we believe it still deserves a premium multiple over its peers," said portfolio analyst Scott Berman. "The bank derives almost half its revenues from a fee-based business, which is less susceptible to the risks of a low-rate environment."
Low rates generally are a drag on banks, curbing the boost in interest income they typically get from passing on higher rates more quickly to borrowers than to depositors.
At the same time, even though oil prices have surged to about $40 a barrel from a low around $26 earlier this year, the drop from above $100 as recently as 2014 has taken such a toll on the energy industry that defaults are on the rise.
So far this year, corporate borrowers are failing on debt payments at the fastest pace in seven years, according to Standard & Poor's. Just this week, the ratings firm assigned default ratings to three oil and gas companies - Midstates Petroleum, Ultra Petroleum and Res Energy Corp.
U.S. banks have set aside reserves equivalent to about 6% percent of their energy loans, Deutsche Bank's O'Connor estimated, adding that it's a valid question whether that coverage level needs to rise to 10% by the end of this quarter.
At Bank of America, another Action Alerts PLUS holding, "a combination of low rates, which squeeze net interest margins, weak capital market activity and an acceleration in loan loss provisions -- particularly within the energy patch -- will continue to pressure both the top and bottom lines for at least the first half of 2016," Cramer wrote in a weekly investor note.
JPMorgan Chase said in February it would set aside about $500 million this quarter to cover energy losses, with an additional $1.5 billion needed if oil prices averaged around $25 a barrel through 2018. Citigroup also has warned investors of bigger oil-related losses.
The quarterly results will be "dreadful," Chris Kotowski, an analyst at Oppenheimer, wrote in an April 5 report. He cut his first-quarter profit estimates by 32% for Morgan Stanley, 28% for Citigroup and 26% for Goldman Sachs.