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Wall Street banks look at ‘new normal’ for trading income

A street sign, Wall Street, seen outside the New York Stock Exchange (NYSE) in New York City, New York, USA, January 3, 2019. REUTERS / Shannon Stapleton / File Photo

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NEW YORK, Jan. 19 (Reuters) - Wall Street banks expect trading revenues to fall to a "new normal" somewhere between pre-pandemic levels and the highs of the past two years, top executives and analysts say.

A massive injection of cash into the capital markets from the Federal Reserve led to unprecedented liquidity and trading activity through the pandemic as investors sought opportunities to cash in. But trading revenues at leading Wall Street banks fell in the fourth quarter as markets normalized and the Fed scaled back to buy back its assets. Read more

Banks with large trading desks such as Goldman Sachs (GS.N), JPMorgan (JPM.N) and Morgan Stanley (MS.N) have been the biggest beneficiaries of market volatility, which has allowed traders to enjoy their best period since 2007- 09 financial crisis.

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Now they face the realization that the favorable market background will not last forever.

"None of us could have foreseen the environment we've been living through for the last two years and especially the environment this year, which was obviously a significant tailwind for our business," Goldman Sachs CEO David Solomon told analysts after the bank on Tuesday had earnings that did not live up to market forecasts. Read more

"We see it in no way as a permanent environment that will continue at this pace," Solomon said.

He added that the bank still saw "reasonable" activity in 2022 and that the company could thrive regardless of market conditions.

Leaders of rival JPMorgan Chase & Co (JPM.N) set a similar tone on Friday after the country's largest bank had earnings that disappointed. Read more

"In our key case, markets and banks normalized somewhat in 2022 compared to their respective record years of 2020 and 2021 and resume modest growth thereafter," CFO Jeremy Barnum told analysts.

Barnum said trade volume would still remain elevated by 2022.

"The beginning of a rate hike cycle can be quite healthy for especially interest income," he said.

Analysts also expect the overall environment to remain positive for trading activity, albeit below the level of the past two years.

"The kids from 2020 and 2021 are pretty tall," says Devin Ryan, an analyst at JMP Securities, part of Citizens Financial Group. "We're likely to see a normalization, and the industry is trying to figure out what that normalization will look like."

Leaders at Goldman Sachs, JPMorgan and Morgan Stanley have stressed their confidence in holding on to market share gains achieved during the pandemic, in part as a result of European banks retiring.

Goldman has particularly focused on trading more on behalf of its largest corporate customers.

"There's still an upside for us from a wallet sharing perspective when we look at the broad customer base," Solomon said. "We want to take a more sustainable share of the opportunity the market offers."

Most analysts believe that the outlook for trading companies is better than people expected.

"The outlook for trade is more optimistic," said Kush Goel, a senior analyst at Neuberger Berman in New York. "It does not go back to 2019."

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Reporting by Matt Scuffham in New York Editing by Matthew Lewis

Our standards: Thomson Reuters Trust Principles.

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