Q1 2015 U.S. Investment Banking Round-Up: FICC Trading

The first quarter of 2015 was a strong period for global investment banks in terms of FICC (fixed income, currencies & commodities) trading revenues thanks to a notable increase in debt as well as currency trading activity worldwide from the Swiss central bank’s unexpected move to remove the cap on the Swiss franc. Not all banks benefited equally, though, as the ones relying more heavily on spread products like mortgage-backed securities and corporate bonds had to contend with a lukewarm performance compared to the year-ago period. At the same time, the overall improvement in industry conditions in Q1 2015 compared to Q4 2014 resulted in a significant gain in FICC revenues for each investment bank quarter-on-quarter.

The FICC trading business is no longer as profitable as it used to be prior to the economic downturn of 2008, and a few banks have strategically chosen to reduce their presence in the capital-intensive market. But it still remains a key source of income for most investment banks. In this article we detail the FICC revenues for 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) – over recent quarters, and also explain why these operations are still key to their business models despite the negative impact of stricter regulations.

See the full Trefis analysis for Goldman Sachs | JPMorgan | Morgan Stanley | Bank of America | Citigroup

The table below summarizes the revenues each of the five largest U.S. banks generated through their FICC trading units for each of the last nine quarters. These figures have been adjusted for gains/losses linked to 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. As the DVA is inherently an accounting-related charge, it doesn’t influence operating revenues for any period.

JPMorgan’s dominance in the FICC trading businesses stands out from the fact that the diversified banking giant has held the top position among these banks in terms of FICC revenues in 17 of the last 18 quarters. Citigroup did marginally better on just one occasion over this period – Q3 2012. Notably, Citigroup is the only bank here that has decided to focus only on FICC trading while cutting down on its equity trading operations. On the other hand, Morgan Stanley has shrunk its FICC trading desk considerably since the downturn – choosing to focus on equities instead. Morgan Stanley has made more than $2 billion in debt trading revenues just once in the last three years (Q1 2012), and is the only bank here to report a quarterly loss in these operations since the downturn (Q4 2010 and Q4 2011).

While all the banks detailed here reported a strong improvement in FICC trading revenues compared to the slow Q4 2014, Citigroup and Bank of America saw a year-on-year reduction in these revenues of 10% and 7%, respectively. The reason for this is that these two banks largely trade in spread products (mortgage-backed securities and corporate bonds), which did not witness the kind of gains which rates and currency products recorded over Q1. Moreover, Citigroup also lost millions from the sharp movement in the Swiss franc’s value – something that its rivals leveraged to pocket sizable gains.

Taken together, these five banks made $15.4 billion in FICC trading revenues in Q1 2015 – an increase of just 1% from the $15.2 billion figure in Q1 2014, but more than double the total figure of $7.3 billion for Q4 2014. The chart above, which shows the total FICC trading revenues for these five banks in each quarter since Q1 2015 shows their performance this time around was the best since Q1 2013. It should be noted that the seasonal trading business usually sees an uptick in the first quarter of the year – something that is readily visible from the chart above. But fundamental changes in the industry from a slew of regulations introduced since the downturn has made it much more difficult for the banks to make money through trading operations.

While the figures above allow for a simple comparison of quarterly revenues across the investment banking giants, this data doesn’t really lend itself to understanding the relative importance of the FICC trading desk for a particular bank’s business model. To facilitate a better comparison, we compiled the following table, which consolidates the figures for the last four years into a single set of average numbers.

This table includes the average quarterly revenues each bank reported over the nine-quarter period from Q1 2013 to Q1 2015 and has been sorted based on the average FICC revenues earned in a quarter. JPMorgan stands out in this regard with its debt trading desk generating $3.7 billion. This is more than 15% of the bank’s total quarterly revenues – a sizable portion considering the diversified nature of the bank’s operations. Citigroup and Goldman Sachs are the only two other banks that rely more heavily on FICC trading revenues to drive their top line.

More importantly, JPMorgan has the lowest volatility in revenues, as shown by the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks. Bank of America has also done well to keep the coefficient figure below 20% over this period. In sharp contrast, revenues for Morgan Stanley’s substantially smaller FICC trading desk has swung widely from quarter-to-quarter with a coefficient of variation of almost 50%. That said, the inherently volatile nature of revenues for the business is evident from the fact that the coefficient of variation is almost 23% for the five banks put together. To put things in perspective, the coefficient of variation for these banks’ equity trading revenues over the same period was under 11% – indicating that the fixed-income trading business is almost twice as volatile as equities trading by this measure.

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