Turmoil in the derivatives market has prompted Salomon Brothers Inc. to lower its fourth-quarter earnings estimates on four of the top five trading banks.
In a recent report, Salomon Brothers' analyst Diane B. Glossman said the deterioration in banks' trading businesses, which began earlier in the year as rates started to rise, shows no signs of abating. As a result, she has lowered her fourth-quarter earnings estimates on Chase Manhattan Corp. to $1.25 per share from $1.47. Chemical Banking Corp. was lowered to 73 cents from 88 cents. Bankers Trust New York Corp. was lowered to $1.60 per share from $1.98 J.P. Morgan & Co. was lowered to $1 from $1.25.
Ms. Glossman maintained her $1.65 estimate on Citicorp, noting that trading represents a smaller percentage of the big bank's overall revenue.
The action comes as rising interest rates, a flattening yield curve, bad publicity, and volatility in the emerging markets conspire to make 1994 the worst trading year in memory.
"No one is having a good year," said Raphael Soifer of Brown Brothers Harriman & Co. "Why not just call it a year and go home. Start fresh again in 1995."
Ms. Glossman estimated that Chase will report $110 million in fourth-quarter trading revenues, down from $188 million in the third quarter.
Total Trading Revenues
Dollars in millions % of % of % of '93 revenue '94(*) revenue '95(*) revenueBankers Trust $1,631 34% $601 16% $840 19%Chase 715 11 728 11 755 11Chemical 1,073 12 750 9 900 11Citicorp 1,934 12 742 5 1,100 6J.P. Morgan 2,059 33 966 17 1,185 19
(*)Estimated.
Source: Salomon Brothers Inc.
Chase said Monday that it expects to report "substantially" lower trading revenues in the quarter, but that the shortfall should be offset by gains in other areas of the bank. The bank did not estimate its fourth-quarter trading revenues.
Chemical is expected to report $150 million in fourth-quarter revenues, said Ms. Glossman, compared with $212 million the previous quarter.
The Salomon Brothers analyst noted that Citicorp is probably the best positioned of the five trading banks because it derives only between 5% and 10% of its revenues from trading activities. Ms. Glossman estimates Citicorp will have fourth-quarter revenues of $225 million, down from $287 million in the third quarter.
Bankers Trust is estimated to have revenue of $185 million in the quarter, down from $278 million.
J.P. Morgan should report revenues of $100 million, Ms. Glossman said, down from $282 million in the third quarter. The venerable bank stunned analysts last week by announcing it expected to post lower fourth-quarter earnings.
That announcement, said Ms. Glossman, "provided a wake-up call" to the industry that trading revenues will be dismal across the board.
The analysts agreed that while there are no guarantees that 1995 will be a better year, things should improve.
"This year was a very bad year, which followed a very good year in 1993, so naturally it looks worse," said Mr. Soifer. "Next year will unlikely be as bad as this year."
"We assume that 1995 will be somewhat easier," said Ms. Glossman. "It can be worse, but that is not what our estimates assume."
In trading Tuesday, Chase's stock remained unchanged at $35. Chemical fell 12.5 cents to $37.125. Citicorp rose 12.5 cents to $43.125. Bankers Trust remained unchanged at $57. Morgan fell 75 cents to $55.75.
