Jan. 16 - A drop in fixed-income business at Goldman Sachs and Citigroup show early signs of struggle on Wall Street as investors prepare for higher interest rates. Conway G. Gitttens reports.
This winter the road to Wall Street is filled with pot holes - just ask Goldman Sachs. Quarterly profits nose-dived 21 percent at the end of last year - stung by a drop-off in fixed income trading - as investors prepared for a jump in interest rates. Citigroup was hit by the same problem, made worse by that bank's inability to find enough cost savings to bring profits ahead of forecasts. The results echo that of JPMorgan Chase, which along with slower fixed income revenues, also had to dish out $850 million for failing to report suspicious activity related to Bernie Madoff's historic Ponzi scheme. Heading into earnings season analysts were predicting 22 percent earnings growth for the sector, expectations that are proving to be lofty, according to Dick Bove of Rafferty Capital Markets. SOUNDBITE: DICK BOVE, BANKING ANALYST, RAFFERTY CAPITAL MARKETS (ENGLISH) SAYING: "We are in that change over, if you will, from reducing costs to get earnings to selling product to get earnings and I don't think they've quite reached the selling product stage. I think in the first quarter the big increase in product sales or revenue generation and I think at that point something on the order of 12 to 15 percent would be a more rational view of where there earnings may go." But that change over is already bearing positive fruit in at least one big surprise this quarter. Bank of America is finally digging out of the deep hole it fell in during the financial crisis when it bought troubled lender Countrywide Financial. Profits leaped by nearly $3 billion as revenues at some units jumped to a record. Also working in its favor: the No. 2 U.S. bank no longer has to worry about so many loans made before the crisis turning sour, thanks to an improving economy. Old loans, however, are no longer the industry's biggest problem. New mortgage lending at BofA was only half of what it was the previous three months, and at Wells Fargo, the country's biggest lender, a rise in auto loans only partially offset the slowest mortgage lending in five years. Add to that the Volcker rule, which prevents banks from making speculative bets with their own money and stops certain kinds of investing -and the industry won't get much boost from trading either, unless.... SOUNDBITE: DICK BOVE, BANKING ANALYST, RAFFERTY CAPITAL MARKETS (ENGLISH) SAYING: "If it's correct that we are going to see a big increase in M&A activity and a big increase in IPOs then trading will turnaround and start to recover somewhat meaningfully." But don't expect big increases in the stock. Shares of Citigroup tumbled 4 percent following its results after rallying 32 percent last year. And Goldman Sachs lost more than 2 percent after a 39 percent return in 2014..... Morgan Stanley, however, may avoid the same fate when it reports on Friday if catering to wealthy clients pulls in the big dollars it did in previous quarters.