Q2 2015 U.S. Investment Banking Round-Up: Total Trading Revenues

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The second quarter of the year was a lukewarm period for the securities trading industry, as debt trading activity suffered considerably over the months of May and June due to weak economic indicators and the Greece’s debt turmoil. Although equity trading levels remained strong, the overall picture does not look great, as the debt trading industry is much larger. The seasonal nature of the business also did not help, as the exceptionally strong showing over the first quarter of the year makes the Q2 2015 results pale in comparison.

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 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 ten quarters. These figures have been adjusted for gains/losses linked to a revaluation of the banks’ own debt, as the debt valuation adjustment (DVA) is inherently an accounting-related charge and doesn’t really influence operating revenues for any period.

(in $ mil) Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
JPMorgan 6,092 5,374 4,688 4,072 5,214 4,862 4,995 3,638 5,674 4,507
Citigroup 5,449 4,314 3,493 2,868 4,733 3,655 3,744 2,459 4,356 3,715
Morgan Stanley 3,109 2,959 2,545 2,197 3,359 2,800 2,781 1,758 4,171 3,537
Goldman Sachs 5,216 4,254 2,935 3,612 4,431 3,811 3,706 3,067 5,503 3,416
Bank of America 4,150 3,453 3,003 2,984 4,103 3,402 3,273 2,367 3,895 3,325

JPMorgan is the leader in the global trading industry, with the diversified banking group ranking #1 in 17 of the last 18 quarters thanks to its strong position in the debt trading market. Goldman Sachs is the only other bank that has seen the top spot over the last five years, in Q4 2012 thanks to an exceptionally strong equity trading performance that quarter.

The chart below details the total trading revenues for these five banks in each quarter since Q1 2005, and makes it easy to identify trends in these revenues over the last decade.

TotalTrading_15Q2

Notably, trading revenues at these banks have largely trended downward in recent quarters, with the banks reporting a year-on-year reduction in total trading revenues in six of the last eight quarters (exceptions being Q3 2014 and Q1 2015). This can be attributed to two factors: an overall reduction in trading activity over the period due to interest rate uncertainty and high volatility – which are 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 ten 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 23,869 4,912 20.6% 695 14.1%
Goldman Sachs 8,842 3,999 45.2% 812 20.3%
Citigroup 19,245 3,879 20.2% 830 21.4%
Bank of America 21,651 3,396 15.7% 522 15.4%
Morgan Stanley 8,628 2,922 33.9% 650 22.2%
TOTAL 82,235 19,106 23.2% 3,249 17.0%

JPMorgan makes almost $5 billion in trading revenues each quarter, followed by $4 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 nearly half of its total revenues. Morgan Stanley strikes a balance, with trading operations accounting for a little more than one-third of its total revenues – a result of the bank’s increasing dependence on wealth management operations to drive stable profits.

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 above 22% for Morgan Stanley. Bank of America is the only bank that bucks this trend with a commendable coefficient of variation figure of 15% – second only to JPMorgan.

While the previous table provides a clear picture of variations in total trading revenues as a whole, the table below shows the proportion of the trading revenues for each bank that came from the FICC (fixed income, currencies and commodities) and equities desks.

FICC:Equities Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Citigroup 85:15 78:22 80:20 81:19 81:19 82:18 80:20 81:19 80:20 82:18
JPMorgan 78:22 76:24 73:27 79:21 75:25 76:24 75:25 70:30 72:28 65:35
Bank of America 72:28 65:35 68:32 70:30 72:28 70:30 69:31 62:38 70:30 65:35
Goldman Sachs 62:38 57:43 44:56 52:48 64:36 58:42 58:42 38:62 58:42 42:58
Morgan Stanley 49:51 39:61 33:67 32:68 49:51 36:64 36:64 8:92 45:54 36:64
TOTAL 71:29 65:35 62:38 65:35 69:31 66:34 65:35 55:45 65:35 59:41

On average, fixed income operations contribute roughly two thirds of the total trading revenues for these banks, with equities trading bringing in the remaining 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 unquestionably 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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