Q4 2014 Was The Worst Quarter For FICC Trading In Three Years

The fact that FICC (fixed income, currencies & commodities) trading revenues at the country’s largest investment banks took a beating over the last quarter of 2014 is no secret, as each of these banks attributed the notable reduction in their total revenues to a poor performance by their FICC trading desks. While losses incurred by the banks’ commodities trading units from the sharp decline in crude oil prices were an important factor behind the lower revenues, the primary reason was the unexpected increase in debt market volatility over the month of December. The fact that each of the country’s five largest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – reported their lowest FICC trading revenues since Q4 2011 this time around goes a long way in emphasizing how badly the debt trading desks fared in Q4 2014.

Although the FICC trading business is no longer as profitable as it used to be, it remains a key source of income for most investment banks – though a few banks have chosen to reduce their presence in the capital-intensive market. In this article, which is a part of our ongoing series on the largest U.S. investment banks, we detail the FICC revenues for these banks over recent quarters, and also explain why these operations are still key to their business models despite the negative impact of stricter regulations since the economic downturn of 2008.

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 FICC trading units for each of the last eight quarters, as well as for the last two years. These figures have been adjusted for gains/losses linked to 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. As the DVA is inherently an accounting-related charge, it doesn’t influence operating revenues for any period.

JPMorgan’s dominance in the FICC trading businesses stands out from the fact that the diversified banking giant has held the top position among these banks in terms of FICC revenues in 16 of the last 17 quarters. Citigroup did marginally better on just one occasion over this period – Q3 2012. Citigroup is the only bank here that has decided to focus only on FICC trading while cutting down on its equity trading operations. On the other hand, Morgan Stanley has shrunk its FICC trading desk considerably since the downturn – choosing to focus on equities instead. Morgan Stanley has made more than $2 billion in debt trading revenues just once in the last three years (Q1 2012), and is the only bank here to report a quarterly loss in these operations since the downturn (Q4 2010 and Q4 2011). The bank barely avoided a loss this time around, with net revenues of just over $100 million.

While Q4 2014 FICC revenues for each of the banks are dismal compared to the figure for the previous quarter, what stands out is also the notable year-on-year decline. The banks reported declines of at least 30% in these revenues compared to Q3 2014, with the figure for the five banks put together falling by a good 40%. Compared to Q4 2013, the revenue reduction ranged from 15% (Citigroup) to 81% (Morgan Stanley). Total FICC revenues for the five banks fell 29% year-on-year.

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 understanding the relative importance of the FICC trading desk for a particular bank’s business model. To facilitate a better comparison, we compiled the following table, which consolidates the figures for the last four years into a single set of average numbers.

This table includes the average quarterly revenues each bank reported over the sixteen-quarter period from Q1 2011 to Q4 2014 and has been sorted based on the average FICC revenues earned in a quarter. JPMorgan stands out in this regard – generating $3.7 billion from its debt trading desk. This is more than 15% of the bank’s total quarterly revenues – a sizable portion considering the diversified nature of the bank’s operations.

More importantly, JPMorgan has the lowest volatility in revenues, as shown by the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks. That said, the inherently volatile nature of revenues for the business is evident from the fact that the coefficient of variation is more than 30% for the five banks put together. To put things in perspective, the coefficient of variation for these banks’ equity trading revenues over the same period was 13% – indicating that the fixed-income trading business has been least twice as volatile as equities trading by this measure.

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