Morgan Stanley CEO Signals Trading Drop Similar to JPMorgan

(Bloomberg) -- Morgan Stanley Chief Executive Officer James Gorman indicated his firm is seeing similar trading declines as competitors JPMorgan Chase & Co. and Bank of America Corp., which said second-quarter trading revenue is on pace to drop at least 10 percent.
 
The estimates from JPMorgan and Bank of America “are reflecting reality and I don't think we're very different,” Gorman said in an interview with Bloomberg Television's Tom Mackenzie in Beijing. “We all have similar clients, if not the same clients.”

Markets revenue at JPMorgan was down about 15 percent in April and May from a year earlier, driven by a slump in fixed income, Chief Financial Officer Marianne Lake said Wednesday at an investor conference in New York. At Bank of America, revenue from the business will be 10 percent to 12 percent lower, though first-half results should be stronger, Chief Executive Officer Brian Moynihan said at a separate event.

Read more about Lake and Moynihan's comments.

Analysts at JPMorgan warned this month that revenue at the world's biggest investment banks is likely to drop in the second quarter because of the decline in fixed income. The U.K.'s exit from the European Union and U.S. President Donald Trump's surprise election win had been fueling wagers on corporate bonds and the direction of interest rates over the past year, boosting Wall Street trading results. Those types of stimulants have been more scarce in recent months.

Passive Investors

Gorman said markets are facing a “conundrum,” with economic growth generally strong but the world facing an uncertain political environment. Trump's administration has faced resistance in pushing an ambitious agenda of tax overhaul and repealing Obamacare, he said.

“There is enormous uncertainty which typically would breed tremendous volatility and it's not,” Gorman said. “It's this very passive perspective that investors have and I think the downside risk at this point is outweighing the upside risk.”

In April, Morgan Stanley reported $1.71 billion in first-quarter revenue from trading bonds, currencies and commodities, allowing it to beat bigger rival Goldman Sachs Group Inc. for the first time since 2011. After concluding that new rules had permanently impaired the outlook for fixed-income markets, Morgan Stanley moved last year to slash a quarter of its sales and trading staff and sold large chunks of its commodities business.

Read more: Morgan Stanley earnings beat estimates

The results marked the fourth straight quarter Morgan Stanley posted bond-trading revenue exceeding $1 billion after Gorman said the business could produce at least $4 billion annually. The fixed-income division -- crucial to the CEO's plan to improve companywide returns -- was overhauled after revenue plunged to $550 million in the final quarter of 2015. Trading chief Ted Pick cut about 25 percent of the division's staff and assigned equities executive Sam Kellie-Smith to turn around the business.

Asked if he saw further scope for headcount reduction at the bank, Gorman said: “I don't think so.”

“The basic reshaping of the firm that has taken place over five to eight years is essentially done and we feel good about it,” he said.

--With assistance from Alfred Liu

To contact the reporter on this story: Darren Boey in Hong Kong at dboey@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Philip Lagerkranser