Let’s begin with the bad news — the last three months of 2018 were a bloodbath for bond traders. This week’s fourth-quarter reports from America’s big banks have shown that without exception they comfortably missed Wall Street’s revenue forecasts for fixed-income, commodity and currency, or FICC, trading.
JP Morgan, the largest, which has a habit of beating forecasts, was the worst performer in this department. FICC trading revenue was nearly 19 per cent below estimates and, at $1.86 billion, was lower than that of Citigroup, the fourth largest US bank. Goldman Sachs, once the bond-trading king of Wall Street, missed forecasts by 16 per cent; Citi was off by 13 per cent and Bank of America by nearly 12 per cent.
Marianne Lake, chief financial officer of JP Morgan, said on Tuesday that clients had “closed down for the year” in December, the most volatile month for markets in recent memory. Across the big banks, the reasoning for the poor FICC showings was that volatility was too high, so traders decided to sit it out rather than risk losses as clients also took a step back. Perhaps this is why, by mid-December, investors were the most cautiously positioned in US finance stocks in five years, per a survey by Morgan Stanley.
FICC trading used to be a boon for Goldman Sachs. In the last three months of 2016, Goldman pulled in $2 billion in FICC trading income as it, like other banks, reaped the rewards from volatile markets after the Brexit vote and the US elections. However, Goldman has struggled for two years to return to former glories and its FICC trading performance in the fourth quarter of 2018 was its worst in terms of revenue since the financial crisis.
As Goldman has struggled, Morgan Stanley, its closest rival, has taken up the slack. In the first quarter of 2017, FICC trading income at Goldman was flat at $1.7 billion while at Morgan Stanley it nearly doubled to $1.7 billion. Since then, Morgan Stanley generally has outperformed Goldman in FICC trading. Morgan Stanley is due to report its fourth-quarter results and may yet buck the FICC trading trend for the big banks.
Now for the good news — on the whole, outside of FICC trading, fourth-quarter reports from the big American banks have been mixed to good, which is probably a positive, given recent worries about slowing growth. One of the main reasons is that they are making more money than expected from loans, and for this they can thank the Federal Reserve for four interest rate increases last year.
Higher interest rates are not all good — if they are too high, they deter people from taking out mortgages — but at the right level they provide a boost to consumer banking, because they allow banks to widen margins on loans. This helped JP Morgan, Bank of America and Citigroup, which have large consumer banking operations and rely less on mortgage lending.
Goldman Sachs launched Marcus, its consumer bank, in 2016 (and in September last year in the UK), but it is still a minnow compared with its larger rivals. While higher interest rates helped, it was Goldman’s mergers and acquisitions business that powered it past Wall Street’s forecasts, with fees jumping by 56 per cent to $1.2 billion.
If higher interest rates are helping with the top and bottom lines at most of the big banks, a word of caution: the future for rates is foggier than its was in November last year. Back then, the Fed intended to raise rates three times in 2019; in December the forecast was cut to two increases. Now we could be looking at none, given the hints dropped in recent speeches by top Fed officials.
ADVICE Buy Bank of America
WHY The bank’s shares were oversold in recent months but its performance in the fourth quarter showed strength relative to its peers
City Pub Group
In the 14 or so months since its flotation on Aim, City Pub Group has done all that it said it would do, expanding from 33 pubs to 44, with a handful more due to come on stream over the next few months (Dominic Walsh writes). It is in advanced legal discussions on further sites and “continues to appraise multiple opportunities”, with a target of ten to fifteen new sites a year.
As yesterday’s year-end trading update shows, the company has traded well, too. Total turnover reached £45.6 million, up about 22 per cent (despite comparisons with a 53-week prior year), while like-for-like sales were a respectable 1.6 per cent. and even better at 7 per cent in the six weeks covering Christmas.
Most of the like-for-like growth was volume-driven as the company pushed through a 3 per cent price increase only in mid-December. Clive Watson, its executive chairman, said that the group would benefit from the price increase during the course of this year.
Although its pubs serve decent grub, 70 per cent of sales are from drink, putting City Pub Group in a good position to benefit from the strength of so-called wet sales over the past two or three years.
Mr Watson said that about 4 per cent of its turnover was from accommodation and that the group was expanding the number of £100-a-night rooms above its pubs. It has about fifty rooms in five pubs, although it is in the middle of a £5.5 million refurbishment of three “big beasts” in Reading, Cambridge and Parsons Green, west London, adding another fifty rooms.
With net debt of £10.5 million and borrowing facilities of £30 million (which it intends to renegotiate this year to provide further headroom), City Pub Group is well placed to continue expanding, although Mr Watson said that if Britain crashed out of the European Union with no deal the company would “bunker down until some semblance of normality returned”. While that would be disappointing, he insisted that there was “much we can continue to achieve organically” and the shares, up 10p, or 5.1 per cent, at 207p yesterday, and up from 170p at flotation, should go higher.
ADVICE Buy
WHY Good trading prospects with an expanding asset base