Q4 2013 U.S. Investment Bank Round-Up: Equity Trading

by Trefis Team
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Always an integral part of an investment bank’s business model, the equity trading business has become more important to banks since the economic downturn of 2008, as tougher regulation has forced them to take a hard look at their more profitable fixed-income trading operations. While all global investment banking giants have scaled down their fixed-income trading desk over the last couple of years, some of them like UBS (NYSE:UBS) and Morgan Stanley (NYSE:MS) have shrunk them to bare-minimum levels – choosing to focus almost entirely on equities trading instead.

In this article, which is a part of our continuing series to compare the relative performances of the country’s five largest investment banks, we detail the revenues generated by the equities trading operations at these banks. We also discuss how the equities revenues at the banks - Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – impact their top-line figures.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The table below summarizes the revenues each of the five largest U.S. banks generated through their equity trading units for each of the last eight quarters, as well as for the last three 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 on these banks).

(in $ mil) Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2011 FY 2012 FY 2013
Goldman Sachs 2,358 1,696 2,105 2,351 1,957 1,823 1,641 1,725 8,065 8,510 7,146
Morgan Stanley 1,833 1,144 1,228 1,271 1,594 1,806 1,821 1,705 6,151 5,476 6,926
JPMorgan 1,424 1,043 1,044 895 1,340 1,296 1,249 873 4,476 4,406 4,758
Bank of America 1,059 780 715 713 1,149 1,194 970 904 3,750 3,267 4,217
Citigroup 916 561 522 465 826 942 710 539 2,402 2,464 3,017

The clear domination of Goldman Sachs and Morgan Stanley in the equities trading business becomes evident from the table above – monopolizing the first two ranks on the list for each quarter. In fact, Goldman has ranked first in terms of equities trading revenues for 11 of the last 12 quarters (except Q3 2013). Both the investment banks rely heavily on market making, hedging and algorithmic trading operations to boost their top-line figures. In comparison, Citigroup has a considerably smaller equities trading desk – choosing to focus on fixed-income trading instead. Citigroup has made more than $1 billion in equities trading revenues just once in the last three years (Q1 2011).

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 an understanding of the relative importance of equities trading desks in a particular bank’s business model. To facilitate a better comparison, we compiled the following table which consolidates the figures above into a single set of average quarterly numbers.

(in $ mil) Total Revenues Equities Revenues Equities / Total Std. Dev. Std. Dev./ Mean
Goldman Sachs 8,098 1,977 24.41% 264 13.3%
Morgan Stanley 7,567 1,546 20.43% 259 16.8%
JPMorgan 24,239 1,137 4.69% 212 18.7%
Bank of America 22,144 936 4.23% 206 22.0%
Citigroup 18,699 657 3.51% 254 38.7%
TOTAL 80,747 5,772 7.15% 1899 32.9%

This table includes the average quarterly revenues each bank reported over the same twelve-quarter period and has been sorted based on the average equities revenues earned in a quarter. Goldman Sachs stands out in this regard – generating just under $2 billion from its equities trading desk. This is almost 25% of the bank’s total quarterly revenues – a little less than the near-30% it generates from fixed-income trading on average.

Notably, Morgan Stanley’s equities trading desk – which makes $1.5 billion on average each quarter – contributes more than 20% of its total revenues. In comparison, its fixed-income business is responsible for 15% of total revenues – making Morgan Stanley the only bank among the five to make more money from equities trading than fixed-income trading.

A relevant point here is that despite raking in the most cash from their equities unit compared to their more diversified competitors, both Goldman and Morgan Stanley have the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks. This would suggest that their trading risks are largely balanced, likely thanks to the sheer volume of trades they enter into over a period.

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