Signaling that recently rising interest rates may be hurting the bond trading activities of several Wall Street firms, Salomon Inc. said Wednesday that it expects to report a “modest” loss in the current first quarter.
The once-venerable firm--which has been trying to reduce its dependence on trading--blamed the expected poor results on adverse trading conditions over the past few weeks in its Salomon Bros. government bond operations and its Philipp Bros. commodity operations. In last year’s first quarter, Salomon earned $173 million.
Analysts said other securities firms are likely to report similar poor earnings, in part because of recent sharp rises in interest rates. They have caused bond prices to plummet, pushing some firms’ trading operations into the red. Similar sharp rises in interest rates in 1987 also caused trading profits of several Wall Street firms to plummet.
“During periods of high market volatility, the firm’s trading operations often show wide swings--sometimes favorable and sometimes adverse,” the company said in a statement. “The first quarter has been one of those periods.”
“Most firms will have problems with government bond trading profits in the first quarter,” said Perrin Long, securities industry analyst at Lipper Analytical Services in New York. He predicted that before-tax earnings for the industry as a whole will drop to $600 million to $750 million in the January-March quarter, compared to $1.1 billion in 1988’s first quarter.
Other firms, however, are unlikely to report actual losses in the quarter because they are less dependent than Salomon on bond trading for their profits, Long said. Instead, firms like Merrill Lynch, Paine Webber and Shearson Lehman Hutton may simply report lower earnings compared to the year-ago quarter.
Another source of lower earnings will be reduced commission income from lower post-crash trading volume in stocks, as well as higher expenses.
The poor expected results for Salomon also indicate that turnaround efforts being engineered by Salomon Chairman and Chief Executive John H. Gutfreund still have a way to go. He has been reducing the firm’s traditional dependence on stock and bond trading while increasing its role in investment banking, merchant banking and advisory services.
Salomon said Wednesday that its other operations are doing well and it does not expect a repeat of the first-quarter experience.
However, the firm in the past year has been racked by morale problems and the departure of several key employees. And earnings have yet to catch up with the $557 million earned in 1985, when Salomon was regarded as a bond trading powerhouse and the most profitable firm on Wall Street. Earnings totaled $280 million last year.
Salomon has since been viewed as a possible takeover target and enlisted the help of Omaha-based investor Warren Buffett to bolster its takeover defenses by acquiring a significant stake in the firm.
In active trading on the New York Stock Exchange, Salomon’s shares dropped 87.5 cents Wednesday to close at $24.375 a share.