Bonds

Wall Street profits dip 4.3% in first half

Wall Street’s profits declined 4.3% to $13 billion in the first half of the year compared to the same period in 2022, according to a report issued Thursday by New York State Comptroller Thomas DiNapoli.

DiNapoli said the data shows the financial industry’s return to pre-pandemic levels of revenue after it had record profits in 2020 and 2021.

“These are volatile times in America and globally and Wall Street’s relatively stable profits and employment levels could change quickly,” said New York State Comptroller Thomas DiNapoli.

Bloomberg News

“The securities industry’s two years of record profits helped stabilize New York’s economy in difficult times,” DiNapoli said. “Since then the industry has maintained profits consistent with pre-pandemic levels.”

Industry profits of $25.8 billion in 2022 were down 55.8% from 2021, the report said, adding it was on par with pre-pandemic performance. Annual profits averaged $22.3 billion from 2015 to 2019. This trend continued through the first half of this year.

If the rate of decline in the first half of 2023 holds steady for the rest of the year, annual profits could fall to $24.7 billion for the full year.

However, economic uncertainties could cause profits to decline even more in the second half.

Financial firms’ interest expenses were seven times higher in 2022 than in 2021 as the Federal Reserve tightened monetary policy to fight inflation, the report said.

The industry saw a 46% decline in revenue from commissions and underwriting activities over the past two years, due to the higher cost of credit and a significant drop in debt and equity issuances and mergers and acquisitions, according to the report.

In 2021, the most recent year for which data is available, the securities industry was responsible for 16.4% of New York City’s and 7.3% of the state’s total gross product, the report noted.

Over time the securities industry has been contributing less to the state’s coffers. In 2012, it was responsible for 18% of all economic activity and, the report said, in 2022 it will likely drop to pre-pandemic levels of around 14.5%, as was seen in 2019.

In fiscal 2023, the comptroller’s office estimates Wall Street was responsible for $5.4 billion in city tax collections, down 16% from the record high of $6.4 billion in 2022. The majority of the revenue, about 74%, was in the form of personal income taxes, which accounted for 23% of the city’s total income tax collections.

However, the industry’s overall share of city tax revenue declined to 7.5% in fiscal 2023 from 9.3% in fiscal 2022, although it was still higher than its pre-pandemic levels, the report said, adding, revenue could decline further in fiscal 2024 — perhaps to levels seen in the five years prior to fiscal 2021, when it averaged $2.7 billion a year and 6.7% of total tax collections.

The securities industry also contributes to the city’s property tax revenues.

The financial services sector is estimated to occupy about 30% of all commercial office space in the city and is mostly renting the higher-valued Class A properties. The office sector accounts for over one-fifth of overall property tax revenues, which are forecast to be $32.6 billion in fiscal 2024.

If the move to hybrid work or cost cutting maneuvers causes financial firms to reduce their office footprint, it could impact city tax revenues significantly, the report warned.

The city is one of the biggest issuers of municipal bonds in the nation. Its general obligation bonds are rated Aa1 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency.

In the second quarter of fiscal 2023, the city had about $39.3 billion of GOs outstanding. Separately, the city’s Transitional Finance Authority has about $45.1 billion of debt outstanding as of the second quarter of fiscal 2023, while the Municipal Water Finance Authority has around $32.3 billion of outstanding debt.

New York State is also affected by Wall Street profits and losses because the state relies more heavily than the city on personal income taxes. The industry accounted for $28.8 billion, or 27.4%, of all tax collections in fiscal 2023. About 89% of this came from personal income tax, the report said.

New York issuers sold $18 billion of municipal bonds in 184 sales in the first half of this year, although this was down 33% from the $26.9 billion in 286 deals sold in the first half of 2022. The drop may reflect a return to baseline after the exceptionally prolific year New York issuers displayed in 2022, when the state led the U.S. in municipal bond issuance.

The state’s general obligation bonds are rated Aa1 by Moody’s and AA-plus by S&P, Fitch and KBRA.

Looking at employment, the industry fared better than most other sectors during the pandemic, losing just 1.6% or 2,900 jobs in 2020, compared to a 12.2% overall loss in the private sector. The current 195,100 jobs in the industry are the most the city has seen in the sector in over 20 years and reflect the hiring that took place after profits soared in 2021, the report said.

Despite losing some of jobs to other states, New York remained the nation’s largest employer in the securities industry. New York State was home to 207,500 securities industry jobs in 2022 while in comparison, California had the second highest number of industry jobs at 97,100.

After two years of record highs, employee bonuses declined along with their firm’s profits.

In March, DiNapoli’s office estimated the bonus pool for 2022 was $33.7 billion, 21% smaller than in 2021. Bonuses account for an estimated 38% of securities industry wages, more than any other industry in the city.

Securities industry performance is measured by the pretax profits of the broker/dealer operations of New York Stock Exchange member firms. There are now 132 member firms, down from the more than 200 in 2007 — before the Great Recession.

“These are volatile times in America and globally and Wall Street’s relatively stable profits and employment levels could change quickly,” DiNapoli said. “Further declines could weaken New York’s tax revenue from the securities industry and have repercussions for our state and city budgets.”

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