Morgan Stanley Leads U.S. Banks In Equity Trading Revenues For 2014

The last quarter of the year is usually the slowest period for global investment banks worldwide in terms of equities trading revenues, and the fourth quarter of 2014 was no different in this regard. While debt trading revenues at the largest U.S. banks dropped over the period due to the sudden increase in debt market volatility in December, the equities trading desks at most of the banks helped mitigate the negative impact on the top line.

In this article, which is a part of our ongoing series on the largest U.S. investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – we highlight the trends seen in equity trading revenues for the banks and how important these revenues are to the business model of each of these banks.

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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 two 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. As the DVA is inherently an accounting-related charge it doesn’t influence operating revenues for any period.

The domination of Goldman Sachs and Morgan Stanley in the equities trading business is evident from the table above, as they have monopolized the first two ranks on the list. Notably, Goldman ranked first in terms of equities trading revenues in each of the ten quarters between Q1 2011 and Q2 2013, after which the spot has been held by Morgan Stanley in each quarter except for Q4 2013 and Q4 2014. While Goldman Sachs made more than $7.1 billion in equities trading revenues over full year 2013, Morgan Stanley took top honors this time around with total revenues of $6.9 billion in 2014.

This trend is easy to explain given the fact that Morgan Stanley was implementing sweeping changes to its business model over 2011-2012. The bank’s revitalized business model focuses significantly on equities trading, while its fixed income trading operations have shrunk to a fraction of their pre-2008 size. Both Morgan Stanley and Goldman 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 not made more than $1 billion in equities trading revenues in any quarter since Q1 2011. Notably, Citigroup’s 13% lower equities trading revenues in Q4 2014 compared to Q4 2013 makes the globally diversified banking group the only one among these five banks to see a reduction in these revenues year-on-year.

Taken together, these five banks made just over $6 billion in equities trading revenues in Q4 2014 – a 6% reduction from the $6.4 billion figure in Q3 2014, but 8.5% higher than the total figure of $5.5 billion for Q4 2013.

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.

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 equities revenues earned in a quarter. Goldman Sachs stands out in this regard – generating just over $1.9 billion from its equities trading desk. This is 23% of the bank’s total quarterly revenues – a little less than the near-30% it generates from fixed-income trading on average. It should be noted, however, that Goldman’s equities trading revenues have been on a decline over recent years, with the average quarterly figure falling from more than $2 billion in 2011 and 2012 to $1.8 billion in 2013 and to below $1.7 in 2014.

Morgan Stanley’s equities trading desk – which made almost $1.6 billion on average each quarter – contributes more than 20% of its total revenues. In comparison, its fixed income business is responsible for less than 15% of total revenues – making Morgan Stanley the only bank among those detailed here to make more money from equities trading than fixed income trading. Also, the bank’s average quarterly revenues have grown considerably over recent years – rising from under $1.4 billion in 2012 to well over $1.7 billion now. The chart below captures the size of Morgan Stanley’s equities trading assets over the years and also shows our forecast for these assets.

The other three banks generate less than 5% of their total revenues through equities trading – a result of their more diversified business models that focus considerably on other financial services offerings including retail banking, commercial banking and even custody banking.

A relevant point here is that despite bringing in the most revenue 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 of less than 15%. This would suggest that their trading risks are largely balanced, most likely thanks to the sheer volume of trades they execute over any period.

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