Volatility Saved Wall Street In The First Quarter. Now Comes The Hard Part

Like its peers, Morgan Stanley reported strong trading results for a quarter characterized by unprecedented volatility.

FICC revenue jumped 29% YoY to $2.2 billion, well ahead of estimates ($1.77 billion) thanks to strong client engagement. Strength in rates, FX and commodities was tempered by declines in credit and municipal securities. The bank cites “market dislocations”, an amusing understatement. In equities, revenues were $2.4 billion, likewise better than expected. All in all, the bank logged $4.87 billion in trading revenue.

Q1 was a banner quarter for Wall Street’s traders – plain and simple. If you’re keeping score, trading desks at the major firms generated nearly $28 billion in revenue during the first three months of the year. Every bank saw at least a 20% YoY jump.

But it’s probably not sustainable. It’s impossible to predict how traders will navigate ongoing turmoil, and as we saw in Q4 2018, volatility doesn’t always mean favorable outcomes across trading desks.

The worry, of course, is that without the boon from blockbuster trading results, banks will be left out in the rain with no umbrella. We’ve seen JPMorgan, Citi and Bank of America set aside billions for likely defaults and missed payments, while Goldman took a big hit on credit exposure in its lending arm. That presages what’s coming in the second quarter when the hurricane that is mass layoffs and business closures will make landfall, as it were.

For Morgan, early warning signs were evident in the line items just below trading revenues in institutional securities. Investments revenue dropped from a year ago thanks to what the bank described as “a markdown on an energy-related investment”. That wasn’t large. But, the decline in “other revenues” was.

Specifically, Morgan took a near $1.1 billion hit within institutional securities thanks to, quote, “mark-to-market losses on corporate loans held for sale due to the widening of credit spreads and an increase in the allowance for credit losses for loans held for investment, as a result of the credit deterioration that began in March”.

In the color that accompanied the bank’s characteristically spartan press release, Morgan calls what you see in red in the visual “notable”.

“We experienced significant decreases in the valuation of loans and commitments, investments and certain classes of trading assets, an increase in the allowance for credit losses, and reduced net interest income and investment banking fees”, the bank says, adding that “the credit deterioration within Institutional Securities was notable, with mark-to-market losses, net of economic hedges of $610 million on loans held for sale and a provision of $388 million for credit losses on loans and unfunded lending commitments held for investment”.

The bank stated the obvious, warning that “an extended period of depressed economic activity necessitated to combat the disease will adversely impact future operating results”.

As for the likelihood that robust trading revenues can be counted on to save the day, Morgan said simply that the quarters ahead could be defined by “the continuance of many of the same negative impacts [but] without the potential benefit of higher client trading activity experienced in the first quarter”.

90% of the bank’s employees are working from home.