This Is Bad News for Third-Quarter Bank Earnings

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While most banks should turn in solid performances for the third quarter, there's reason to believe that revenue and profits will be weighed down by at least one ongoing trend. Over the past week, the nation's biggest banks -- specifically those with significant investment banking operations -- warned investors that revenue from trading activities is trending down.

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The chairman and CEO of JPMorgan Chase (NYSE: JPM), Jamie Dimon, said at a conference this week that the New York City-based bank expects trading revenue to be down by 20% in the three months ending Sept. 30. That compares to a 14% year-over-year drop in market-related revenue at JPMorgan Chase last quarter.

Bank of America (NYSE: BAC) confirmed that it's seeing a similar trend. Its chief financial officer, Paul Donofrio, told analysts and investors at the same conference that trading revenue at the Charlotte, North Carolina-based bank will be down around 15% in the third quarter.

Citigroup (NYSE: C) chimed in as well, with Chief Financial Officer John Gerspach announcing that it, too, expects trading revenue to fall 15% compared to the year-ago period. And Goldman Sachs (NYSE: GS) also noted that its trading revenue is being weighed down, though the company didn't quantify how much it's lagging.

"It's a pretty challenging environment for us," said Goldman Sachs Co-President Harvey Schwartz.

It's never good when revenue or earnings fall, of course, but investors should appreciate that trading results are notoriously volatile. They'll be up one quarter by a significant degree, only to then fall by an equal margin the next quarter.

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Consequently, as Dimon noted in his presentation at the Barclays' financial conference in New York, it's important not to pay too close of attention to the fluctuations, as doing so can mask more meaningful and longer-lasting trends.

The issue right now is that there isn't enough volatility in the markets. Gerspach made this point in his presentation, saying that volatility "has remained somewhat subdued throughout this quarter, especially when you compare it to the third quarter of last year where we had a lot of activity in the markets in the third quarter of last year, both on the heels of Brexit and then in advance of the U.S. elections."

The chief financial officer of Citigroup added, "We're not seeing that right now."

The ups and downs of trading results at banks like Bank of America, Goldman Sachs, Citigroup, and JPMorgan Chase cause analysts to adjust their estimates and commentators to write about any anticipated declines. But the more important trends to watch when banks report third-quarter results next month will instead concern loan growth, credit quality, and lending margins, the principal drivers of a bank's fundamental performance.

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John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.