B-Ds Boosted by Bonds

Terry Flanagan

While many of the big broker-dealers have been taking it on the chin in recent months, a resurgence in fixed-income and a stronger IPO market have provided a much needed boost.

Thus far in 2012 the Wall Street banks and brokers have performed well, and are largely expected to post solid numbers from their capital markets units when fiscal first quarter financials are released.

“We believe this was driven by discounted valuations at year-end 2011 as well as strong fixed income trading and improved IPO activity during the quarter,” said analysts at Keefe, Bruyette & Woods in a first quarter report.

Brokerage stocks during the first three months of the year performed well, with average share price increases of around 27% for four of the top firms. JPMorgan Chase and Goldman Sachs were each up some 30% year-to-date, with Citigroup just behind at 29%. Morgan Stanley had a strong three months as well for the most part, but a fall in recent weeks has left it up just 19% year-to-date.

Fixed income trading was very strong in the quarter, with total TRACE (Trade Reporting and Compliance Engine) average daily volume of $19.9 billion up 42% sequentially and down slightly from the prior year. High-yield trading was particularly strong, up 57% sequentially and 5% from the prior year.

Jefferies is among the banks many expect to pick up some of the slack from the bulge bracket banks scaling down their operations ahead of looming regulation. The broker capitalized on the surge in fixed income trading during its fiscal first quarter of the year, with its investment banking revenue jumping 20% to $286 million, and revenue from fixed income, currencies, and commodities trading growing 7% to $339 million. Contrast this with its stock-trading revenue dropping 23% to $136 million and clearly it shows the importance of diversifying operations and being able to adjust to the prevailing environment. Its share price also reflects its strength, which is up some 29% for the year through April 10.

Fixed-income trading platforms are also taking advantage of the surge in bond trading.

“The first quarter of 2012 is the best quarter ever on MarketAxess,” said Rick McVey, chief executive of MarketAxess, a bond trading platform. More telling is that the record quarter was driven by an increase in market share, not trading volume, as activity remained virtually flat from year-ago levels.

However, despite the strong performance seen so far, difficulties continue to lie ahead as the economy struggles to gain its footing.

“The primary headwinds appear to be weakness in M&A activity as well as slower equity trading volumes,” said the KBW report. “We expect that firms with more diversified business models will generate the strongest results for the quarter.”

The other units of the big banks are not expected to perform as well as their trading divisions, as lending and investment banking activity remain depressed.

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