NEW YORK (Reuters) – Wall Street banks have been among the biggest beneficiaries of the pandemic-era trade boom, fueled by the massive injection of liquidity by the Federal Reserve into financial markets.
As the central bank nears the time to start cutting back on asset purchases, banks should profit again as increased volatility encourages clients to buy and sell more stocks and bonds, analysts say. , investors and executives.
The Fed has been buying government guaranteed bonds since March 2020, adding $ 4 trillion to its balance sheet, as part of an emergency response to the COVID-19 pandemic.
The strategy aimed to stabilize financial markets and ensure adequate access to capital for businesses and other borrowers. It was successful, but also brought unprecedented levels of liquidity, helping stock and bond traders enjoy their most profitable times since the 2007-09 financial crisis.
The top five Wall Street investment banks – JP Morgan Chase & Co, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup – made $ 51 billion in additional trading revenue last year and in the first three quarters of 2021, compared to comparative quarters. in the year leading up to COVID, according to company tax returns.
Commercial boom of the pandemic era Commercial boom of the pandemic era
The commercial windfall, along with a boom in global transactions, has helped bank stocks outperform the broader market. The KBW Bank index has risen 40% since the start of the year compared to a 19% increase for the S&P 500.
Now banks with large trading companies are expected to profit a second time as the Fed begins to pull back the stimulus, prompting investors to reorganize their portfolios again.
âAs investors seek to position themselves based on this volatility, it creates an opportunity for us to create markets for them. And obviously that would lend itself to improved performance, âCitigroup CFO Mark Mason told reporters this week.
Fed Chairman Jerome Powell signaled in late September that the cut was imminent. An official announcement is expected in November and the central bank has indicated it will seek to stop asset purchases altogether by mid-2022 – a timeline some investors see as aggressive.
Banks have already benefited from increased volatility since Powell’s comments in late September, which led to higher Treasury yields and lower equity markets. This led to a pickup in transaction volumes at the end of the third quarter and the start of the fourth quarter, according to executives.
âWe may see episodes of volatility associated with the downturn,â Morgan Stanley CFO Sharon Yeshaya said in an interview Thursday, adding that she did not expect a repeat of the â tantrum âfrom 2013.
Around this time, the Fed’s decision to halt a quantitative easing program caused a frenzy in the markets as investors ditched riskier assets in favor of “safe havens”, causing yields to surge. government bonds and a sharp drop in the stock markets.
Fed officials are confident they can avoid this scenario this time around by giving markets enough advance warning of their intentions.
âThe sweet spot is where you have some volatility, but not enough to disrupt the broader capital markets, which have been a major contributor to good trading results over the past year,â said Devin Ryan, analyst at JMP Securities.
The third quarter results of the largest US banks this week showed strong performance in equity trading, boosted by stocks reaching record highs, but a more subdued performance in bond trading reflecting the calm in these markets.
Investors expect activity to pick up again in the face of the reduction, when it does finally begin.
âIt will definitely be positive,â said Patrick Kaser of Brandywine Global Investment Management. “Volatility is a friend of trading firms.”
Additional reporting by David Henry; Editing by Andrea Ricci