Outlook in 2010- Trading Revenue Vs Investment Banking (GS, MS, JEF)

FBR Capital Market analysts Steve Stelmach and Amy DeBone are not very enthusiastic about the trading income in 2010. This was not the case in 2009 because despite lower leverage, the investment banking industry was able to maintain its ROE by obtaining higher risk premiums.

Analysts anticipate that in 2010 the risk premiums would be restored to pre crisis levels. This contraction in risk premiums will be seen due to the security purchases by the Fed. This contraction combined with same levels of leverage will hamper trading revenue. But investment bank dealers like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS) and Jefferies Group Inc., (NAS: JEF) will unwind the Federal’s balance sheet and create a market for these securities by charging a higher risk premium.

The analysts have given an outperform rating to Goldman Sachs and market perform rating to Morgan and Jefferies Group. For Goldman, the analysts predict that its book value accretion will outpace its trading while for Morgan and Jefferies analysts predict that its quantitative easing unwind will largely sustain its revenues.