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Large Banks Warn Trading Profits May Continue to Dwindle

“Executives from some of the biggest U.S. financial firms said a slump in trading that has hammered bank results for more than a year is likely to continue to weigh on profits.

Large investors are retreating from the market, big trades are rare and price swings are shrinking, executives told investors at an industry conference in New York on Tuesday. Those factors have combined to reduce trading revenue, particularly in fixed-income, currencies and commodities trading, traditionally a profit engine for large banks.

Citigroup Inc. C +0.59% Chief Financial Officer John Gerspach told investors the bank expects the slide it has reported in markets revenue to deepen in the second quarter. “People lack direction,” Mr. Gerspach said, speaking about investor behavior at the conference sponsored by Deutsche Bank AG. “People are uncertain. There just isn’t a lot of movement.”

His words echoed the comments of J.P. Morgan Chase JPM +1.12% & Co.’s head of investment banking, Daniel Pinto, who said volatility levels were at 10- to 15-year lows. He said that even if trading volumes rise, it is hard to make money if volatility is low. “If the market doesn’t move, it’s really difficult,” he said.

The comments follow several quarters of disappointing results in trading. Aside from Citigroup and J.P. Morgan, Goldman Sachs Group Inc. GS +1.01% and Bank of AmericaCorp. BAC +0.72% also have struggled as trading slowed. Some investors have begun to worry that the slowdown may be more than a temporary phenomenon. Some have expressed concern that the decline could be more permanent as regulators limit banks’ own trading and risk-taking in general.

“Until you see volatility increase, trading revenues in general will be challenged,” said Barclays analyst Jason Goldberg. He said the second quarter is shaping up to be tough in part because commodities-trading revenue likely won’t be as high as in the first quarter.

J.P. Morgan’s Mr. Pinto said he believed the decline likely would be temporary, or cyclical, rather than part of a long-term trend.

Stocks of big banks rallied Tuesday after Bank of America said it would press ahead with scaled back plans for a dividend, despite an error in calculating its capital disclosed last month…..”

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