Wall Street banks this week detailed billions of dollars in potential losses from the war in Ukraine, while warning they saw no end in sight for the market turmoil sparked by the Russian invasion.
Analysts and industry executives described the losses as manageable, but raised concerns about the potential for ripple effects of the type that led to some nickel trades being canceled on the Metals Exchange. from London last month.
Jamie Dimon, chief executive of JPMorgan Chase, said during his bank’s first-quarter earnings report: “I can’t foresee any scenario where you won’t have a lot of volatility in the markets.”
David Solomon, his counterpart at Goldman Sachs, said traders would have to navigate new political ground. “The Russian invasion has further complicated the geopolitical landscape and created an additional level of uncertainty that I hope will last longer than the war itself.”
Citigroup, which had been trying to sell off its retail business in Russia when the war broke out, has faced the biggest headwinds of the conflict. It said its potential losses could be $2.5 billion to $3 billion and set aside $1 billion in loan loss reserves as it braced for the impact.
The bank’s loss estimate has been complicated by whether it will be able to sell its Russian holdings as the United States and other Western governments impose tough sanctions in response to the US invasion. Ukraine by Vladimir Putin.
“This is a fluid situation and the ability to exit these companies will really depend on how the environment changes,” said Mark Mason, Citi’s chief financial officer.
JPMorgan said it has provisioned about $300 million to cover markdowns on loans associated with Russia. It also attributed $120 million of a $524 million trading loss in the quarter to its role as counterparty in a short trade by Chinese metals group Tsingshan that proved disastrous amid market turmoil that followed the outbreak of war.
Dimon said the bank would conduct a review of what it could have done better to handle the situation, as well as the role of the LME, which has been criticized for canceling several hours of trading.
Goldman, which disclosed in February that its exposure to Russia was $650 million, said it suffered a net loss of about $300 million on investments related to Russia and Ukraine.
“Our positions were relatively small, but we focused on closing them out and reducing our exposure,” Solomon said on a call with analysts.
Morgan Stanley said it had “limited” direct exposure to Russia after giving up its banking license in the country years before the invasion.
“I can’t predict second-order volatility in the market,” Sharon Yeshaya, chief financial officer, told the Financial Times. “[But] we are still subject to it and we will all have to face it.
Losses reported by US banks are small compared to their profits, supporting the view of many financial analysts at the start of the Ukraine conflict that they were less risky than their European peers.
Citi’s $1 billion provisions were about 5% of revenue in the quarter and Goldman’s $300 million loss was about 2% of revenue. JPMorgan’s provisions were less than 1% of revenue.
“The biggest Russian issue for banks is not their direct exposure, but the possibility that the commodity market disruption will precipitate a recession,” said Eric Hagemann, senior research analyst at Pzena Investment Management. “High gas prices may drive up credit card delinquency rates, especially at the lower end of the income scale, but that’s not yet showing in the numbers reported by anyone.”
The impact of the Russian invasion was also felt in investment banking, with activity, particularly in equity underwriting, slowing. Investment banking revenue fell 43% at Citi, 37% at Morgan Stanley, 36% at Goldman and 32% at JPMorgan.
“Enhanced [market] the volatility has led clients to delay issuance activity,” Yeshaya said.
The hit was cushioned by better-than-expected results from the commercial arms of major banks, which benefited from intense customer activity in response to volatile commodity prices and the implementation of higher rate by the Federal Reserve.
“The big story this quarter was trading revenue, which more or less bailed out banks, because investment banking revenue was really weak overall,” said Edward Jones analyst James Shanahan.
One of the big winners from the volatile markets was Goldman, which saw revenue from its trading division rise 4% to $7.87 billion, remaining above pre-pandemic levels and well ahead of analysts’ forecast of $5.86 billion. Revenue from fixed income, currencies and commodities trading reached $4.7 billion, well above estimates of $3.1 billion.
“We suspected [Goldman’s] The commodities sector could lead to an upside surprise, but we significantly underestimated the magnitude,” Oppenheimer banking analysts wrote in a note.
Morgan Stanley’s trading revenue rose 1% to $6 billion from the same quarter in 2021, beating forecasts of $4.84 billion. Fixed income trading revenue was $2.9 billion, versus estimates of $2.1 billion, while equity revenue was $3.1 billion, beating expectations by 2. $59 billion.
At Citi, trading revenue fell 2% year-on-year to $5.8 billion. “Obviously, the Russian-Ukrainian war has led to significant volatility in [foreign exchange] markets,” Mason told reporters. “We were able to take advantage of that and we were well positioned to do that in commodities.”
JPMorgan Chase saw its trading revenue drop 3% to $8.75 billion.