How The Country’s Biggest Banks Stack Up In Equity Trading

by Trefis Team
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The equity trading business comes with considerable risk, ties up capital, makes volatile contributions to the top-line and has an uncertain future given the trends in electronic trading, program trading, algorithmic trading and the like. But ask any of the country’s biggest banks about it, and they will readily stand behind this business simply because of the money-minting potential it still presents at “acceptable” levels of risk.

This article highlights the revenue trends that drive the U.S. banks’ strong support for their equity business even as the government and various regulatory bodies find ways to rein it in. After all, it should come as no surprise that Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) boast of running some of the largest trading units in the world. But based on how each of them has performed over the last two years, one can get some pretty interesting insights into the difference in the ways they run their equity trading desks.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The table below summarizes the revenues each of the 5 largest U.S. banks generated through their equity trading units for each quarter over the last two years. 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).

$ million
Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 FY11 FY12
Goldman Sachs 2,336 1,349 (1,288) 1,278 2,198 205 1,915 1,934 3,675 6,252
Morgan Stanley 1,732 1,801 1,341 1,277 1,833 1,144 1,228 1,271 6,151 5,476
JPMorgan 1,478 1,145 1,047 806 1,424 1,043 1,044 895 4,476 4,406
Bank of America 1,299 1,046 753 652 1,059 780 715 713 3,750 3,267
Citigroup 1,089 790 290 233 903 550 510 455 2,402 2,418

A quick glance through the above figures gives the reason behind Goldman Sachs’ and Morgan Stanley’s reputation in the global equity trading business. Both banks reported annual revenues from equity trading in excess of $6 billion once over the last two years. But the figures also show a marked difference in their underlying trading philosophies.

It would appear that Morgan Stanley is more cautious about its equity exposure as its revenues do not fluctuate a lot between quarters. Considering that the bank generated $1.3 billion in revenues each quarter over the latter half of 2011 when the global equity markets went for a toss means that the bank hedges its bets to a great extent – staying content with the limits to the upside in order to cover potential losses.

On the other hand, Goldman’s revenues over the same period have fluctuated wildly – from peak gains of $2.3 billion profit in Q1 2011 to a loss of $1.3 billion in Q3 2011. In 2012 too, profits of around $2 billion in Q1, Q3 and Q4 set apart the uninspiring $205 million gain in Q2 2012. Goldman therefore appears to be more risk-taking in its trading approach. An overview of Goldman’s equity trading yields since 2008 and the impact on the bank’s overall share price can be obtained from the chart below.

JPMorgan’s equity trading revenues are also characterized by considerable regularity, with the bank routinely generating over a billion in a quarter. The apparent seasonality in the numbers (with Q1 being the most profitable and Q4 being the least) is most likely a coincidence given the small sample of historical data presented here.

As for Bank of America and Citigroup, their equities revenues are quite correlated to the market performance with the figure rising and falling with the overall market, and peer group, for a given period.

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