The idea of debt or equities trading has lost quite a lot of its appeal over the recent years with tighter regulations looking to clamp down on the volatile business. The continuing pressure on investment banking giants across the globe has reduced the revenues these banks generate through trading operations – especially with legislation banning them from entering into proprietary trades.
Despite the changing global scenario, investment banks still make a sizable chunk of their quarterly revenues by engaging in trading activities. In this article, which is a part of our continuing series on the relative performance of the country’s five biggest investment banks - Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – across several metrics, we pit the trading revenues of these banks side-by-side to see who generates how much by engaging in fixed-income and equities trading activities. 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 the total revenue figure.
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 ten 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|
|Bank of America||5,296||3,296||1,306||1,955||5,189||3,335||3,249||2,501||4,150||3,453|
The first thing that comes to mind on looking at the table is that the five banks make roughly $20 billion in revenues through trading activities each quarter. This certainly make it hard to believe that these figures are at a reduced level compared to what they were before the economic downturn of 2008. But then, the extreme volatility in the business also stands out – given the fact that the total revenue figure has swung considerably between $10 billion to $30 billion over the span of just two-and-a-half years.
Coming to the performance of individual banks, JPMorgan has the distinction of earning the most from trading activities for more quarters than any of its competitors listed here. Holding on to the top position in 8 of the last 10 quarters is no small feat. The only other bank to hold the top spot is Goldman Sachs – in each of the remaining 2 quarters (Q1 2011 and Q3 2012). Quite notably, Morgan Stanley ranks last in most of these quarters, which highlights the reduced focus on trading activities by the banking giant in order to grow its wealth management business.
The next table shows what proportion of the trading revenue seen about for each bank came from the fixed-income desk and equities desk 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|
|Bank of America||75:25||68:32||42:58||67:33||80:20||77:23||78:22||71:29||72:28||65:35|
One can conclude that fixed-income operations contribute to roughly 70% of the total trading revenues of these banking giants and equities trading brings in the remaining 30%. But there is quite a lot of variation in this figure across banks.
While Citigroup relies on fixed-income trading more heavily that the others (approx. 80:20), Morgan Stanley’s seems to prefer equities trading more (approx. 40:60). 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.