Buy the Bank Trading Dip--Heard on the Street

By Aaron Back Features Dow Jones Newswires

A decline in second-quarter trading revenues for major banks is no reason for panic. Investors should focus on bigger, more positive trends that will drive bank shares.

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Investors were spooked on Wednesday by comments from two top banks. Speaking at an investor conference, J.P. Morgan Chase Chief Financial Officer Marianne Lake said markets revenue in the second quarter is running around 15% below the same period a year earlier. Bank of America's chief executive was less specific, saying trading revenue is down slightly compared with last year.

Shares of both are down about 2%, but this reaction seems disproportionate. The second quarter of 2016 was unusually strong, as trading bounced back from an exceptionally weak first quarter. It seems like an eternity ago now, but at the start of 2016 collapsing oil prices and fears of a China crash had put markets in a deep freeze.

This year is seeing a more normal seasonal pattern, with strong trading in the first quarter as investors position for the coming year, followed by a slowdown in the second quarter.

Combining the first and second quarters provides a better picture. A second-quarter decline of 15% at J.P. Morgan, as suggested by Ms. Lake, would mean the bank's first-half markets revenue falls just 1.5% from the first half of 2016.

That isn't terrible considering that equity-market volatility has been near all-time lows. If 2016 taught investors anything, it should be that trading activity could rebound at any point.

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More important, the Federal Reserve is set to unveil its latest stress tests results later this month, and is likely to permit banks to accelerate share buybacks and dividends. This powerful lever, not quarter-to-quarter variations in trading performance, is where bank investors should focus.

Write to Aaron Back at aaron.back@wsj.com

(END) Dow Jones Newswires

June 01, 2017 11:57 ET (15:57 GMT)