The trading business has lost some of its luster since the economic downturn of 2008, with stricter regulations forcing banks to do away with proprietary trading units and also shrink their overall operations to comply with tighter capital norms. But there is no denying that the business still remains one of the most lucrative revenue streams for banking giants around the globe – albeit a particularly volatile one.
Earlier this week, we detailed the performance of the debt- and equities-trading desks at each of the country’s five largest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – as a part of our articles How Do Debt Trading Revenues Stack Up At The Largest U.S. Banks? and Which U.S. Bank Has The Best Equities Trading Desk? These articles pit the banks against each other in terms of the amount of money their fixed-income and equities trading operations roped in over the last two years. We now present a side-by-side view of the total revenues trading operations generated for these banks over the same period. We also help understand the extent of each bank’s focus on fixed-income and equities by showing the percentage contributed by the two trading desks to total trading revenues, while also discussing the importance of trading in each bank’s overall business model through the share of trading revenues in the total revenues on an average.
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The Trading Business Ropes In Roughly $20 Billion In Revenues For These Banks Each Quarter
The table below summarizes the revenues each of the five largest U.S. banks generated through their fixed-income and equities trading activities for each of the last eleven quarter. These figures have been adjusted for gains/losses linked to a revaluation of the banks’ own debt as the DVA figures from one quarter to the next are often so drastic that revenues cannot be compared side-by-side without such an adjustment (see our article Banks’ Debt Valuation Accounting Rules Need A Revision for more detailed information about DVA and its effect on these banks).
|(in $ mil)||Q1 2011||Q2 2011||Q3 2011||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Bank of America||5,296||3,296||1,306||1,955||5,189||3,335||3,249||2,501||4,150||3,453||3,003|
As the table demonstrates, these five banks bring in around $20 billion in revenues through trading activities each quarter. The extreme volatility in the business also stands out, as evidenced by the fact that the total revenue figure has swung between $10 billion to $30 billion over this period.
JPMorgan has the distinction of earning the most from trading activities for more quarters than any of its competitors listed here – making the most money from trading operations in 9 of the last 11 quarters. Goldman Sachs grabbed these honors for the remaining 2 quarters (Q1 2011 and Q3 2012). Notably, Morgan Stanley ranks last in most of these quarters, which highlights the reduced focus on trading activities by the bank in order to grow its wealth management business.
… And Most Of It Comes From Fixed-Income Trading
The next table shows what proportion of the trading revenues for each bank came from the fixed-income and equities desks, respectively. For the instances in which revenues from the fixed-income and/or equities trading desk for a bank was negative in a quarter, we have represented them in the table as N.M. (not meaningful).
|FICC:Equities||Q1 2011||Q2 2011||Q3 2011||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Bank of America||75:25||68:32||42:58||67:33||80:20||77:23||78:22||71:29||72:28||65:35||68:32|
On average, fixed-income operations contribute roughly two-thirds of the total trading revenues of these banking giants and equities trading brings in the remaining third. But there is a lot of variation in this figure across banks. While Citigroup relies on fixed-income trading more heavily than the others (approx. 80:20), Morgan Stanley’s focus clearly weighs towards equities trading. Goldman’s volatile revenue figures also stand out, with the bank reporting roughly equal revenues from both trading desks in some quarters, and almost no revenues at all from the equities desk in some.
Not All Banks Rely Equally On Trading Revenues For Top-Line Figures
The following table consolidates the total trading figures into a single set of numbers along with each bank’s average total revenues over the period. The data has been sorted based on the average trading revenues earned in a quarter.
|(in $ mil)||Avg. Total Rev.||Avg. Trading Rev.||Trading/Total Rev.||Standard Dev.|
|Bank of America||22,204||3,339||15.04%||1,216|
While Goldman’s trading operations account for nearly half its total revenues, the contribution of these operations towards Bank of America’s top line is just over 15%. Also, despite making the most revenues from trading operations among the banks, JPMorgan manages to earn almost 80% of its total revenues from other sources – highlighting the extent to which the bank has diversified its business model.