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

2014 ended on a low note for investment banks around the globe in terms of trading activities, as the unexpected increase in volatility last December hurt debt trading revenues. This resulted in banks reporting their worst quarterly trading results in three years for Q4 2014. But a number of factors worked in tandem over the first quarter of 2015 to help the banks post a strong trading performance this time around. Firstly, the seasonal trading business normally witnesses the highest level of activity over the first three months of a year. Secondly, improved market sentiments around the globe have fueled a rally in share prices at nearly every major stock exchange in Q1. And finally, the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc gave global debt and currency trading a boost over the period.

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 over recent years, while analyzing the relative importance of these trading desks for each of the banks.

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 trading activities for each of the last 9 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.

As the table demonstrates, these five banks raked in total trading revenues ranging from $13 billion (Q4 2014) to $24 billion (Q1 2013) over the last nine quarters. The figure for Q1 2015 was $23.6 billion – an increase of 8% from the $21.8 billion figure in Q1 2014 and a good 76% higher than the total figure of $13.3 billion for Q4 2014. The seasonal nature of the industry is also evident here, with Q1 being the strongest quarter for investment banks and Q4 being the weakest. This trend stands out in particular in the chart below, which represents total trading revenues for these five banks since Q1 2005.

Notably, trading revenues increased year-on-year in Q3 2014 after falling notably in each of the previous four quarters, only to fall sharply in the fourth quarter. This trend can be attributed to two factors: an overall reduction in trading activity over the period due to interest rate uncertainty and high volatility – temporary factors – and a reduction in total market size as a result of stricter regulations – a permanent factor. While trading revenues are likely to pick up over subsequent quarters as the Fed hikes benchmark interest rates, the lasting impact of tighter regulation 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 nine quarters. The data has been sorted based on the average trading revenues earned in a quarter.

JPMorgan makes almost $5 billion in trading revenues each quarter, followed by $4.1 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 almost half its total revenues. The predominantly investment banking-focused Morgan Stanley strikes a balance, with trading operations accounting for a little more than one-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 15%, it is almost 23% for Morgan Stanley. Bank of America is the only bank that bucks this trend with a commendable coefficient of variation figure of 16% – second only to JPMorgan.

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 FICC (fixed income, currencies and commodities) and equities desks.

On average, fixed income operations contribute roughly two-thirds of the total trading revenues for these banks, with equities trading bringing in the remaining one-third. But there is a lot of variation in this proportion across banks. While Citigroup relies on fixed income trading more heavily than the others (approximately 80:20), Morgan Stanley’s focus is clearly on equities trading. Goldman seems to give both its trading desks roughly the same amount of importance, with their respective share of the total trading revenues fluctuating considerably over the quarters.

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