Banks Manage to ‘Bond with the Best’, Deliver Strong Profit Growth in Q2

The rush of deals bolstered the income for the deal making units for banks.

Banks on Wall Street have been on a roll. The crisis created in the first quarter drove the opportunities in the second quarter, driving business to deliver stellar results. As they announced results for the April-June quarter, they have surprised the street on the upside, by a wide margin in some cases.

The expected surprise has come from the bond trading revenues as banks seized the opportunity. The market for investment-grade corporate debt has been so strong that in the first five months of the year, companies had raised $1 trillion. Cashing in on the opportunity, banks have reported one of their best quarters ever.

The numbers looked too good to be true. In the case of Morgan Stanley, the fixed income revenue went up 3X as it posted its highest ever revenue and profit. JPMorgan, which had a stellar first quarter, still managed to improve on its numbers while Goldman Sachs saw its profit rise despite provisioning $1 billion towards litigation expenses.

Recent stock performance

An opportunity worth the wait

It has been a tumultuous time for banks in the last few quarters. 2019 has been the most profitable year in U.S. history. When the February-March sell-off happened, banks expected the worst.

Financial markets witnessed a freeze in activity during the first quarter after the sell-off, reminiscent of the 2008 crisis. Fed stepped and so that companies could raise fresh capital to tide over the thaw. With the opportunity nearly guaranteed to work for them, banks rushed in and cut deals to raise capital for companies in distress. Till May 2020, companies had raised a never seen before $1 trillion by selling bonds.

The rush of deals bolstered the income for the deal making units for banks.

Goldman Sachs’ fixed income unit made $7 billion during the first half of the year compared to $3 billion in the same period last year. Citi’s comparable numbers for the first half of 2020 was $10 billion against $7 billion while the largest U.S. bank JPMorgan made $12 billion against $7 billion last year. The three together made $29 billion against $17 billion last year. Bank of America and Morgan Stanley are yet to report their quarterly results.

Revenue: Fixed income unit

The gravy train may not last, though. Investors are worried that default on loans could start to pick up in the second half of the year as the stimulus impact begins to wear off.

Tesla: Defying gravity

If there is one stock that has been on the roll, it has to be Tesla. When it announces numbers after the closing bell today, its announcement is expected to be very closely watched.

If Tesla’s results can convince the market that its lead against other EV manufacturers is increasing, the dream run of the stock will continue. If it can follow up with announcements that detail expansion of its capacities, it will add to the frenzy for the stock. If Tesla announces a profit for the quarter, the fire could rage far and wide.

In the last few weeks Tesla has emerged as the most valuable car company in the world, ahead of Toyota. During 2019, Toyota sold 2.4 million cars and trucks, over 12X of Tesla’s 192,500.

With the sharp run up in valuations, announcements around the expansion plans and eking out a profit in its numbers could lend further wings to the stock. A disappointing set of numbers, though, could cause the stock run to come to a screeching halt. From $361 on March 18, the stock has defied the law of graphic to almost hit $1650 this week, a jump of over 4X in four months.

As they say, traders are on the knife’s edge.