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More than $1 billion has been wiped off earnings estimates for Wall Street's five biggest banks in the past month on growing fears of a sharp decline in trading revenues coupled with increased legal costs.
JPMorgan Chase has borne the brunt of forecast cuts, with consensus estimates of net income down $526 million to just under $5 billion. Its growing legal bills alone are expected to add $2 billion in costs when it kicks off the banks' earnings season on October 11.
(Read more: Wall Street's shutdown fears may be overblown)
But the depressed forecasts have extended to all banks with big fixed income trading operations, after several warnings of slow activity throughout the last three months. Hopes of a final trading flurry in the last few weeks of the quarter have been dashed, with fixed income trading revenues particularly hurt.
"September hasn't delivered," said Paul Gulberg, analyst at Portales Partners in New York. "It wasn't there to fulfil the expectations and save the day."
Analysts reduced their expectation of net income by $210 milion for Citigroup, $128 million at Bank of America, $123 million at Goldman Sachs and $97 million at Morgan Stanley, according to Bloomberg data. Those forecasts strip out the distorting effect of an accounting rule that forces companies to take profits or losses from changes in the value of their own debt.
Brad Hintz, an analyst at Sanford C. Bernstein, cut his earnings per share estimate for Goldman Sachs and Morgan Stanley on Friday, citing "a full scale rout in trading".
(Read more: Budget battle continues to weigh on Wall Street)
Alarm bells rang this month after Jefferies Group, an investment bank that reports before its bigger peers, reported an 85 per cent drop in fixed income revenues in the three months to August compared to the three months to May.
Concerns extend to merger and acquisition advice, where the value of closed deals is expected to decline. Although mega transactions such as the Verizon-Vodafone deal have encouraged hopes of a revival, investment banks will not reap the fruits until the deals close.
Some analysts point to the improving credit quality of banks' borrowers, which will reduce losses and support profits. Financial institutions with smaller investment banks, such as Wells Fargo, have not suffered the same estimate cuts.
(Read more: Washington likely to drive Wall Street)
However, they face their own headwinds. Mortgage banking – more than 10 per cent of Wells Fargo's revenues – is threatened by a drop in refinancing, with rising rates deterring borrowers from getting new loans and depriving banks of the associated fees. Citigroup and Bank of America are also expected to suffer as rising interest rates stunt refinancings.