Analysts Say Executives' Optimism Is Overblown
The heads of the major money-center banks are convinced that second quarter revenues from derivatives trading cannot possibly be as dismal as those posted in the first quarter.
Others are not so sure.
"The second quarter may be a touch better," said Benoit Jadoul, vice president of exchange marketing at Chase Manhattan Corp. But he added, "In the first quarter the markets were extremely fickle. Now there is a reduced appetite for risk assumption."
Mr. Jadoul said he would "be surprised" if second quarter revenues were significantly higher than those of the first because the lack of any trend in the market is causing investors to take a "wait and see" attitude.
"You need a clearly defined trend to do well," Mr. Jadoul said. "You continue to ride the crest of a wave in an up market and the the trough in a down market. There is no trend in the second quarter. People who like to trade in and out of the market found it very difficult to make any money."
Mr. Jadoul also pointed out that those dealing in foreign currencies also are having a tough time right now because there are no solid trends for them to follow.
"There was a lot of selling of the dollar in the first quarter," said Mr. Jadoul. "The dollar should be stronger than it is now. As long as we are stuck in the very narrow range versus the Deutschemark, we'll be slow. People who trade currencies as a commodity are waiting for a trend."
Those comments were less enthusiastic than remarks made by the chief executives of the largest U.S. banks at the International Monetary Conference in London last week. The CEOs were optimistic that trading revenues will rebound for the second quarter, and their tone suggested a strong quarter is in the offing.
Chase's Trading Revenues
For the first quarter of this year, Chase Manhattan Corp. turned in one of the better performances, recording $179 million in trading revenues. The notional value of Chase's drivatives portfolio stood at $981.7 billion at yearend 1993.
Citicorp reported trading revenues of $71 million for the first quarter, on a portfolio of more than $2 trillion.
First Chicago Corp., with a 1993 derivatives portfolio worth $436.9 billion last year, reported a $25 million loss for the first quarter.
Bankers Trust New York Corp., with a notional value in derivatives of $1.9 trillion last year, reported trading revenues of $14 million for the first quarter of 1994.
But together, their trading revenue fell to 854 million, from 2 billion in the fourth quarter of last year. Quarterly trading revenue had peaked in the second quarter of 1993 at 2.2 billion.
According to Standard & Poor's Corp., derivatives accounted for a large portion of trading at the money-center banks in 1993. The firm said that derivatives accounted for 36% of J.P. Morgan's trading revenues, 42% of Chemical's, 27% of Citicorp's and 25% of Chase Manhattan's.
While some banks -- like Citicorp, Bankers Trust, and First Chicago -- turned in lackluster performances, others only looked weak in comparison to the record performances of 1993.
At the London conference last week, the bankers said that with current market conditions, second quarter revenues are almost certain to improve.
But while the stable market will help reduce the bank's losses, it also will lower profits, some analysts said.
"There is an element of wishful thinking" in the chief executives' statements, said Scott Winslow, an analyst with SNL Securities, Richmond, Va.
"There was a lot of volatility of rates in the first quarter, but that is starting to stabilize now. There is a sense that this quarter they will do better," he said, suggesting a modest improvement is underway.
Mr. Winslow agreed with those who say fears are overblown, however, saying the emphasis of news accounts is usually on the negative aspects of the market, rather than on the positive.
"First Chicago, for example, had big gains on their equity securities investments in the first quarter. They made about $134 million," he said. "But you only hear the horror stories. You never hear about how a bank made a billion dollars with derivatives.
Forecast for Money-Centers
Ronald Mandle, an analyst with Sanford C. Bernstein & Co., said second quarter revenues will be better at most of the money-center banks, though some will perform better than others.
"Citibank, Bankers Trust and Chemical will probably do better than the others," he said. "Bank stocks have outperformed this year. We like them as a group."
He added that J. P. Morgan may have a tough time improvinng its trading revenues this quarter, but the bank can offset that with the $227 million earnings anticipated from the sale of equity in Columbia Health Care.
Mr. Mandle also said Chase may not post some gains it did in the first quarter, but it should do well.
"Trading revenues will be up," he said. "I think it will be a decent quarter."
SNL Securities' Mr. Winslow noted that there probably will be a slowdown risk assumption, due to the negative publicity garnered by recent derivatives and bond fund losses.
"You'll see a little less emphasis on derivatives, as a result," he said.
Mr. Winslow also said that despite the high-profile losses posted by companies like Procter & Gamble Co. in the derivatives market, derivatives still are a good hedging vehicle.
"Bankers Trust wasn't trying to fool P&G," he said. "They just got caught on the wrong side of interest rate swings. There's a real need for these types of things and these banks are good at it."