Wall Street has had a rough year. That’s old news.
Pretty much every business line in the investment bank posted lower revenues for the first half than a year ago. Banks are cutting jobs, or moving them to “low-cost locations.”
There is a developing sense, however, that things might be looking up. In short, there is a glimmer of light at the end of the tunnel.
Earlier this week, Jefferies reported a jump in profit for the three months ending August 31, driven by strong revenue in its fixed income trading business.
Commentary around the results was hardly bullish, with management citing “reasonably steady” markets in fixed income and equities.
But that added to earlier comments from the Citigroup chief financial officer John Gerspach, who had said that markets revenues were above expectations. Morgan Stanley’s CFO said there had been “good” activity levels in fixed income meanwhile.
And now JPMorgan’s top banks analyst, Kian Abouhossein, has raised his earnings-per-share estimates for global investment banks. He said in a note out September 22:
“We believe that strong Q2 IB revenue performance has continued in 3Q in some product areas, primarily in US Rates & Credit, whereas Cash & Equity derivatives is seeing slower than normal seasonality.”
“Sep. is a key month for Q3, however, a strong July and better than seasonal Aug. and Sep. so far is leading us to upgrade our IB revenue estimates & we now forecast 3Q IB revenues to be -10% q/q (+2% y/y). We expect FICC (-4% q/q, +26% y/y) to outperform Equities (-18% q/q, -14% y/y) and we forecast IBD revs to be -10% q/q (-4% y/y). As a result, we upgrade our EPS estimates by 6%/5%/3% in FY16/17/18.”
To put that in plain English, the performance in July was strong, and August and September have been better than usual. The biggest upgrade was for Goldman Sachs, with 2016 EPS estimates being raised by 8%. The analyst raised estimates on Morgan Stanley by 6%.
With the third quarter about to come to a close, we’ll soon find out whether that light in the tunnel is a sign of better things to come, or an oncoming train.