Q2 2014 U.S. Investment Bank Round-Up: Total Trading Revenues

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GS: Goldman Sachs logo
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Goldman Sachs

Since the economic downturn of 2008, banks across the globe have implemented considerable changes to their trading operations to comply with increased capital requirement norms as well as stringent regulations such as the Volcker Rule, which restricts proprietary trading activities. While almost all U.S.-based banks have done away with their proprietary trading desks over the recent years, some global banks such as UBS (NYSE:UBS) and Morgan Stanley (NYSE:MS) have gone so far as to slash their capital-intensive fixed-income trading desks to a bare minimum size to meet Basel III capital requirements.

Despite the fact that these sweeping changes have negatively impacted revenues over the recent years, trading still remains an important part of the business model of banking giants, and is arguably their most lucrative revenue stream. Earlier this week, we detailed the performance of the FICC trading desks 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 (NYSE:BAC) and Citigroup (NYSE:C). In this follow-up piece, we present a side-by-side view of the total trading revenues generated by these banks each quarter since early 2011, while analyzing the relative importance of these trading desks for each of the banks.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

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The table below summarizes the revenues each of the five largest U.S. banks generated through their trading activities for each of the last 10 quarters. These figures have been adjusted for gains/losses linked to a revaluation of the banks’ own debt as the debt valuation adjustment (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 really influence operating revenues for any period.

(in $ mil) Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
JPMorgan 6,440 4,536 4,770 4,072 6,092 5,374 4,688 4,072 5,055 4,647
Goldman Sachs 5,933 3,883 4,554 4,468 5,216 4,254 2,935 3,612 4,431 3,811
Citigroup 5,697 3,422 4,261 3,206 5,449 4,314 3,493 2,868 4,733 3,655
Bank of America 5,189 3,335 3,249 2,501 4,150 3,453 3,003 2,984 4,103 3,402
Morgan Stanley 4,427 1,914 2,686 2,082 3,109 2,959 2,545 2,197 3,359 2,800
TOTAL 27,686 17,090 19,520 16,329 24,016 20,354 16,664 15,733 21,681 18,315

As the table demonstrates, these five banks bring in around $20 billion in combined revenues through trading activities each quarter. The seasonal nature of the industry is also evident here, with Q1 being the strongest quarter for investment banks and Q4 being the weakest. Notably, revenues for each of the last four quarters (Q3 2013 through Q2 2014) have been considerably lower compared to the same period the previous year. This is due to two primary reasons: an overall reduction in trading activity over the period (a temporary factor) and a reduction in total market size as a direct result of stricter regulations (a permanent factor). While trading revenues are likely to pick up later this year as interest rates react to the Fed’s tapering plan, the lasting impact of tighter regulations means that these revenues are unlikely to reach the record levels seen in 2010.

The following table consolidates the total trading figures into a single set of numbers along with each bank’s average total revenues over the last thirteen quarters. The data has been sorted based on the average trading revenues earned in a quarter.

(in $ mil) Total Revenues Trading Revenues Trading/ Total Std. Dev. Std. Dev./ Mean
JPMorgan 24,166 4,929 20.4% 930 18.9%
Goldman Sachs 8,260 4,270 51.7% 1,018 23.8%
Citigroup 18,847 3,885 20.6% 1,059 27.2%
Bank of America 22,146 3,373 15.2% 1,052 31.2%
Morgan Stanley 7,738 2,763 35.7% 869 31.5%
TOTAL 81,157 19,220 23.7% 4,586 23.9%

JPMorgan makes roughly $5 billion in trading revenues each quarter followed by $4.3 billion on average for Goldman. Despite making the most revenues from trading operations among the banks, JPMorgan actually earns almost 80% of its total revenues from other sources – highlighting the extent of diversification in the bank’s business model. On the other hand, Goldman’s trading operations account for well over half its total revenues. The predominantly investment banking-focused Morgan Stanley strikes a balance, with trading operations accounting for a little more than a third of its total revenues.

An interesting thing to note from the table is the fact that the banks with higher trading revenues also demonstrate lower volatility in these revenues – captured here as the ratio of standard deviation to mean of quarterly revenues for each bank. While this figure is lowest for JPMorgan at less than 19%, it is more than 31% for Bank of America and Morgan Stanley.

While the previous table provides a clear picture of variations in total trading revenues as a whole, the next table shows what proportion of the trading revenues for each bank came from the fixed-income and equities desks.

FICC:Equities Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
Citigroup 84:16 84:16 88:12 85:15 85:15 78:22 80:20 81:19 81:19 82:18
JPMorgan 78:22 77:23 78:22 78:22 78:22 76:24 73:27 79:21 74:26 75:25
Bank of America 80:20 77:23 78:22 71:29 72:28 65:35 68:32 70:30 72:28 70:30
Goldman Sachs 60:40 56:44 54:46 47:53 62:38 57:43 44:56 52:48 64:36 58:42
Morgan Stanley 59:41 40:60 54:46 39:61 49:51 39:61 28:72 22:28 50:50 37:63
TOTAL 73:27 69:31 71:29 65:35 71:29 65:35 62:38 63:37 70:30 66:34

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 (approximately 80:20), Morgan Stanley’s focus clearly weighs towards equities trading. Goldman seems to give both its trading desks roughly the same amount of importance, with their respective shares fluctuating considerably over quarters.

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