The last time U.S. banks encountered a crisis of this magnitude, huge trading losses added to the burden of rapidly souring loans. This time around, the traders delivered much needed relief.
Wall Street trading desks — long the target of cost-cutting and regulations aimed at reining in risks at banks — notched their best quarter in eight years as clients rushed to change or hedge positions in the most volatile period on record. That helped the industry's largest firms remain profitable even as they set aside more for bad loans in the first quarter than they did in all of 2019.
The quarter marked a reversal of recent years, when booming consumer lending units propped up trading divisions grappling with a prolonged revenue slump. With the coronavirus pandemic shuttering businesses across the country and costing millions of people their jobs, the five biggest U.S. banks set aside roughly $25 billion to cover future losses from defaulted loans.
"There's been a lot of talk about the industry losing trading talent," said Marc Nachmann, co-head of Goldman Sachs Group's trading division. "The reality is we've shown we are no less equipped in a time of so much volume and market stress."
Bond and stock traders at Goldman, J.P. Morgan Chase, Bank of America, and Citigroup produced $22.7 billion in revenue. Every firm posted a more than 20% jump from a year earlier, with J.P. Morgan achieving record revenue and Citigroup posting a 39% surge.
"Trading was way better than we were thinking — it really stood out," Edward Jones analyst Jim Shanahan said in an interview. The feat was remarkable because banks had so many people working from home, he said. "It gives me a little bit of confidence that as they continue to have some revenue challenges in the near term — think about fee waivers they're granting to consumers — I'd look to trading to make up some of that difference."
The cushion provided by trading desks bolsters an argument that banking giants have made to defend their business models since the 2008 crisis: A mix of business lines provides some diversification in a downturn.
"I have long been a fan of diversified business models," Jason Goldberg, an analyst at Barclays who's covering his 100th bank earnings season, said in an email. "This quarter helps to support that view."
But the results also mark a win for regulators' post-crisis moves, which pushed Wall Street banks to act more like middlemen and take less risk on their books. That allowed them to capitalize on volatility rather than focus on offloading bulky positions in declining markets. The firms remained well above regulatory capital minimums, even as they indicated corporate clients drew down far more than $100 billion on credit lines to weather the crisis.
Where firms still had balance-sheet investments, they felt the pain. Goldman Sachs took an almost $900 million hit on its debt and stock portfolio that contributed to a 46% decline in profit. The company's executives have said they're moving away from taking stakes with the firm's own money to focus on raising more client funds.