Market turmoil that roiled U.S. bond-trading revenues likely to show up in Big Six results as well, analysts say

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Bond traders on Wall Street saw their revenues pummelled by market volatility during the most recent quarter, and analysts predict a similar theme will play out north of the border when the Canadian banks report their earnings results next month.

“Canada doesn’t show the same peaks and valleys as the U.S. markets do, so it’s probably not going to be as dramatic,” Barclays analyst John Aiken said.

But, he added, the Canadian banks have been expanding their U.S. capital markets businesses – and those with more exposure, such as the Royal Bank of Canada, will face greater challenges in their bond-trading divisions.

Goldman Sachs, which reported its 2018 fourth-quarter results on Wednesday, saw revenues in its fixed income, currency and commodities (FICC) trading business decline 18 per cent from a year ago. Citigroup, which reported on Monday, saw profits in its FICC business fall by 21 per cent, while J.P. Morgan’s fixed-income trading business took an 18-per-cent hit, the company reported on Tuesday.

Canada’s big banks begin reporting their own earnings results next month, with RBC first out of the gate on Feb. 22. And although there is only a two-month overlap between the Canadian banks' first quarter and the U.S. banks' fourth quarter, the U.S. results are still closely watched as an indicator of how their northern peers might perform.

In this instance, analysts say the market turmoil that roiled U.S. bond trading revenues are likely to show up in the Canadian banks' results as well, although to a somewhat lesser extent.

“The Canadian banks are not quite as aggressive with their capital," said Jim Shanahan, an analyst at St. Louis, Mo.-based Edward Jones. That means they give up revenue in good times, but it also means they don’t suffer as much during downturns, Mr. Shanahan said.

Expectations that the U.S. Federal Reserve will slow down on its interest-rate hikes could have also affected fixed-income trading.

“That ultimately means that institutions involved in hedging activities don’t feel the need to be as aggressive in the interest rate derivatives markets,” Mr. Shanahan said.

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