Fourth-quarter earnings for the big U.S. investment banks could disappoint investors if falling debt trading volumes hurt what had been the banks' key profit engines in the first three quarters of 2009.

Volumes may have been depressed by customers' aversion to risk late in the year, as well as a shift in the earnings calendars of the banks, re-christened as bank holding companies during the 2008 financial crisis.

Concern about a volume drop-off late last year has been offset among some analysts and investors by hope for a quick rebound in early 2010.

Still, in recent days, the most accurate Wall Street analysts as measured by StarMine have lowered their fourth-quarter forecasts for banks, including Goldman Sachs Group and Morgan Stanley , thanks in part to anecdotal evidence of lower-than-usual trading volume in November and December.

The broader analyst community has also cut their estimates over the last month, but not as deeply.

Consensus has come down in the past two weeks but it hasn't come down nearly enough, at least in our opinion, said Steve Stelmach, analyst at FBR Capital Markets.

I think there is some potential for surprises to the downside, he said.

November and December are usually slow months for trading as key clients go on vacation, but this year markets were exceptionally soporific.

Big run-ups in fixed-income profits earlier in the year may have weighed on volume later on.

From speaking to our customers, it became clear that a lot of them had really good years, and they didn't want to risk giving back some of the gains they had from earlier in the year, said Ward McCarthy, chief financial economist at Jefferies & Co in New York.

The drop in trading volumes at the end of 2009 may be due in part to former investment banks moving their fiscal year-ends to December from November, Stelmach said.

Banks often try to slim down their books at the end of the year. In previous years, investment banks would be cutting positions in November and commercial banks would trim positions in December, allowing clients to trade with commercial banks in November and investment banks in December.

This year all banks were clearing their books for a December year-end, so even if clients wanted to trade then, they had few banks to work with.

There is little hard data to definitively show that volume slowed more than usual in November and December.

But there is anecdotal evidence from conversations with industry officials that supports this notion, said Douglas Sipkin, analyst at Pali Capital.

On Tuesday Sipkin trimmed his fourth-quarter estimates for Goldman and Morgan Stanley, saying he now expects lower trading revenues for both.


The decline in trading volume could have a material impact on bank results. Consider Goldman Sachs -- nearly half of its third-quarter revenue came from fixed income, currency, and commodities trading business.

Analysts on average expect fourth-quarter per-share earnings of $5.34 for Goldman Sachs, 49 cents for Morgan Stanley and 63 cents for JPMorgan, according to Thomson Reuters


But StarMine's SmartEstimate, based on its assessment of the most accurate analysts, has estimates of $5.22 for Goldman, 39 cents for Morgan Stanley and 61 cents for JPMorgan.

To be sure, investors will be watching fourth-quarter results for more than just fixed-income trading volumes.

This is going to be another cleanup quarter, said Peter Kovalski, analyst and portfolio manager at Alpine Woods Capital Investors, referring to the practice of using the fourth quarter to write off bad loans. He said charge-offs and writedowns could have a bigger impact on earnings than the decline in fixed income trading.

And the drop in trading volume may not be permanent. Concern about how the U.S. Federal Reserve will keep short-term rates low without triggering inflation may lead fixed income traders to stake out divergent positions, fueling activity.

Volumes should be still relatively robust in 2010, said Stelmach.

Some analysts expect bumper trading volumes in January and February as the seasonal effect that dampened trading at the end of the year reverses and investors, optimistic about recovery prospects, return to the market.

People are coming back ... putting fresh money to work, said Sipkin. I think you'll see a big pickup in the first quarter.

(Reporting by Elinor Comlay; additional reporting by Dan Wilchins; editing by John Wallace)