Only a few short months ago, JPMorgan Chase traders were on such a roll that they did not have a single losing day in the first quarter.
But when the bank reports its second-quarter results this week, that hot streak will have come to an end.
Analysts expect JPMorgan to count an almost 20 percent drop in its sales and trading revenues, reflecting a slowdown in investor activity and the dismal performance of its fixed-income and commodities groups.
Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are expected to report similar news.
After helping prop up Wall Street during the financial crisis, core trading revenue is projected to drop, on average, by as much as 25 percent from the first quarter, according to Credit Suisse Research .
That will put further pressure on the banks’ growth prospects, which are already strained by stagnant loan growth and more stringent regulation.
It is also prompting nearly every major Wall Street firm to contemplate another round of layoffs amid growing concerns that at least part of the weak results are permanent.
“We are undoubtedly being impacted by lower levels of activity,” said William Tanona, a financial services analyst with UBS . “There is a lot of uncertainty out there.”
Together, the five Wall Street banks are still going to take in more than $20 billion from their core trading operations, largely from business done on behalf of clients.
For example, the banks routinely help airlines hedge oil prices or bring together buyers and sellers of stock, bonds and other complex securities — often putting their own money on the line to facilitate a trade.
But during the second quarter, the business was particularly hard hit.
Trading volumes fell sharply as investors became unnerved by the running debt crisis in Europe, the political standoff over the debt ceiling in the United States, and lingering concerns over the anemic growth of the broader economy.
Even when investors did place their bets, they were far more hesitant to take big risks — something known on Wall Street as lacking conviction. That meant the banks missed out on the lucrative fees they can generate by selling more high-octane products, like complex options and derivatives.
Fixed-income traders, among the biggest moneymakers for Wall Street, faced a bruising market.
In the commodities business, for example, oil, gold and other metals prices had been rising quickly during the early part of the year as investors anticipated high demand for materials to keep the global economy humming.
But as cracks in the recovery kept surfacing, prices headed south — and traders raced to the sidelines. That left most Wall Street desks, which had stocked up on inventory to facilitate trades, holding losing positions.
At JPMorgan Chase, for instance, energy traders were having a gangbuster year, earning several hundred million dollars for its burgeoning commodities unit. Yet when the market turned in early May, they gave back some of those gains, according to market participants. Morgan Stanley, meanwhile, suffered tens of millions in losses on its interest rate desk when a bet on lower inflation turned against the bank’s position.
Mortgage trading did not fare much better. After rallying from highly depressed values for much the last two years, mortgage-backed securities prices fell sharply during the second quarter.
The reason? The government started dumping into the market its vast portfolio of mortgage bonds acquired from its rescue of the American International Group, and investors believed the outsize supply would cause values to plummet. (Only recently, when the Treasury announced it was halting its auctions, did mortgage bond prices start to stabilize.)
Although the banks have slowed the spill of red ink from troubled mortgages and other bad loans, they are struggling to increase revenue in their more traditional banking businesses, too.
New financial regulations have chipped away at once-lucrative sources of income, like overdraft charges and credit card penalty fees. Starting this fall, banks are expecting to absorb a multibillion-dollar hit when they are forced to sharply lower the fees they charge each time consumers swipe their debit cards.
Higher capital requirements, meanwhile, could further depress profits if some banks are forced to lighten their balance sheets or exit certain businesses altogether.
At the same time, the fragile economy has undermined the banks’ bread-and-butter business of lending. Both consumers and businesses have been reluctant to take out new loans.
Meanwhile, the surge in mortgage refinancing last year has petered out, even though interest rates remain at historically low levels.
The upshot is that trading, which has long been one of the biggest drivers of revenue at Wall Street firms and a crucial growth engine at financial conglomerates, has become even more critical.
At Goldman Sachs, for example, trading-related businesses made up almost 79 percent of the bank’s total revenue in the first quarter of 2011, up from 73 percent in 2007, according to UBS financial research.
At a big diversified bank like JPMorgan Chase, sales and trading made up about 21 percent of the bank’s total revenue in the first quarter of 2011, up from 14 percent in 2007.
“It’s gotten bigger, partly because other businesses aren’t firing as vibrantly,” Howard Chen, a financial services analyst at Credit Suisse Research.
This quarter, trading revenue will be up about 10 percent from a year ago. But it is expected to fall sharply from the first quarter, when market conditions were more favorable.
Bank of America hinted at its second-quarter trading results late last month when it announced plans to take a $20 billion hit to help clean up its troubled mortgage business.
Based on the bank’s comments, Credit Suisse analysts are forecasting that sales and trading revenues will be down 23 percent from the first quarter, largely from a falloff in the fixed-income businesses.
Those figures exclude certain one-time items and accounting charges tied to hedging the bank’s own debt and other credit exposures that fluctuate from quarter to quarter.
JPMorgan and Citigroup, meanwhile, could have core sales and trading decline around 20 percent from the first quarter, according to the Credit Suisse research.
Morgan Stanley could record a 25 percent drop, while Goldman Sachs, which has a huge fixed-income business, could have core sales and trading revenue fall around 36 percent.
To make up some of the difference, both firms plan to start swinging the corporate ax. Morgan Stanley, which has added hundreds of workers over the last two years in an effort to rebuild its trading franchise, has turned its attention to cuts in its wealth management unit.
It announced plans to slash $1 billion in noncompensation expenses over three years and eliminate several hundred low-producing brokers.
Goldman, meanwhile, is planning to announce layoffs as it cuts about 10 percent, or roughly $1 billion, of noncompensation expenses over the next 12 months, according to people briefed on the matter who spoke on the condition of anonymity.