Among 2020’s many oddities, add this paradox: The stock market is crushing the banks, even as the banks are crushing it in the market.
After warning that their trading revenues would fall steeply from the second quarter, several top banking executives recently said that the third quarter wasn’t as bad as they had feared. Clients remained active through the normally dull July and August, and September delivered a fresh bout of market volatility.
“We’re not going to have as good a quarter as we did in the second quarter,” Morgan Stanley Chief Financial Officer Jonathan Pruzan said at the
Global Financial Services Conference last week. “But I would say it’s sort of better than a typical summer quarter.”
Add a better-than-average summer to a strong first half, and banks’ trading floors are chasing their best performance in a decade.
Their own stocks, however, are being slammed. The KBW Nasdaq Bank Index is down 38% this year, while the S&P 500 is up slightly. If that gap were to persist, it would be the banks’ worst full-year underperformance in at least 84 years, according to Barclays analyst Jason Goldberg.
Investors have good reason to be concerned. The coronavirus recession has taken a toll on banks’ bread-and-butter lending businesses. Near-zero interest rates and the tens of billions of dollars they have set aside to cover bad loans have cut into profits, outweighing the trading gains.
Banks in the S&P 500 are still expected to post a median 38% decline in third-quarter earnings per share, worse than the broader index, according to FactSet estimates. Financial companies focused more directly on capital markets are pegged for a smaller, 11% decline.
Still, after the Barclays conference last week, Mr. Goldberg suggested the selloff is overdone and lifted his earnings estimates for most of the banks. “We heard more good than bad,” he wrote in a research note.
Investment banking is another bright spot. Banks have done brisk business helping companies raise cash to ride out the downturn, earning fees advising clients on stock and bond sales and, later, trading those securities.
Another strong quarter in trading and investment banking would bolster the argument that the big banks are in better shape than investors think.
At the Barclays conference,
& Co. CFO Jennifer Piepszak estimated total trading revenue would be up 20% in the third quarter from a year earlier.
That is far better than expected. KBW analysts had forecast
trading revenue would fall 17% from the prior year. And while a 20% gain would mark a 37% drop from the second quarter’s…