Equities Trading Stings Wall Street Banks as Investors Embrace BondsEquities Trading Stings Wall Street Banks as Investors Embrace Bonds

By Olivia Oran

Oct 18 (Reuters) - In a reversal of fortune for Wall Streetbanks that have invested heavily in equities trading, clientsflocked back to bonds last quarter and left stocks behind.

In earnings reports over the past several days, Bank ofAmerica and Citigroup saw massive slides inequities trading revenue, while Goldman Sachs Group Inc and JPMorgan Chase & Co posted small increases.

The downturn appears to be a short-term blip related tomarket conditions and is unlikely to affect business strategies,analysts said. Banks have invested in equities trading, eventhough it has relatively slim profit margins, because newcapital requirements are generally more lenient on equityproducts than bond products.

Still, in an environment where banks are under enormouspressure to make sure every dollar invested produces a return,the meager results in equities trading were notable. Analystssaid they would be closely watching performance in the quartersahead.

"While there are some concerns about potential to drivecontinued and sustainable growth in equities, the business isquite a bit friendlier in the new regulatory order," said Nomuraanalyst Steven Chubak.

From 2010 to 2015, equities-trading revenue rose 23 percentacross the industry while bond trading fell 36 percent,according to research firm Coalition. Equities includes revenuefrom trading stocks and related derivatives, as well as primebrokerage services.

Bank executives attributed the recent decline to worriesabout the U.S. election, Britain's vote to leave the EuropeanUnion, and the timing of a rate hike from the Federal Reserve.Stocks are viewed as riskier than bonds, and investors tend toshy away from risk when markets are full of uncertainty.

Equities trading was lower simply because of the "naturalcyclicality" of markets, said Ana Arsov, a bank analyst atMoody's Investors Service. She noted that there was littlevolatility in stock markets last quarter, which meant investorshad less reason to trade.

In discussing the decline in equities trading, Bank ofAmerica Chief Financial Officer Paul Donofrio also highlightedgains in bond trading, arguing that the two businesses can helpoffset each other's pain when times are tough.

"You could see gains one quarter in one place and seesomething lower in another place, and that's okay with us," hesaid.

Among the big Wall Street banks, Citigroup may have the mostat stake.

Management has said that the bank aims to rank fifth orsixth globally in equities trading, from a current position ofeighth or ninth.

But in reporting a 23 percent year-over-year drop inadjusted revenue from the business, senior executives admittedthat Citigroup's investments have not yet paid off - partlybecause rivals are also scrambling to scrape market share from asmaller pie.

"I don't put this out there as an excuse, but ... in a verychallenged volume market, it's tough to take share," saidCitigroup Chief Executive Michael Corbat. "In this type ofenvironment, it just takes a little bit of time."

Citigroup attributed the year-on-year decline to lesstrading of equity derivatives. Bank of America said both cashand derivatives products were less fruitful when reporting a 17percent revenue decline.

Goldman and JPMorgan saw the business climb a modest 2percent and 1 percent, respectively.

Morgan Stanley, which has made equities a pillar ofits trading franchise, reports earnings on Wednesday. (Reporting by Olivia Oran in New York; Additional reporting byDavid Henry; Editing by Lauren Tara LaCapra and Nick Zieminski)