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

Increased volatility in the global equity markets made the second quarter of 2015 an extremely profitable period for investment banks around the globe, as strong year-on-year improvement in equity trading revenues helped banks largely mitigate a lukewarm debt trading performance. While Q2 revenues were slightly lower than the figures for the previous quarter, it should be noted that the first quarter of the year is usually the best period for global investment banks in terms of trading revenues. Q2 2015 saw 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) – report the best total equity trading revenue figure since the economic downturn of 2008, which demonstrates how profitable the period really was.

In this article, which is a part of our ongoing series on the largest U.S. investment banks, we highlight the trends seen in equity trading revenues for the banks over recent quarter, and also how important these revenues are to the business model of each of these 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 equity trading units 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 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 equity trading business is evident from the table above. Notably, these banks have monopolized the top two ranks on the list for every quarter since Q1 2011. While Goldman held the top spot in Q4 2014 and Q1 2015, Morgan Stanley churned out its best equities performance since the downturn to reach the top of the list in Q2 2015.

Both Morgan Stanley and Goldman rely heavily on market making, hedging and algorithmic trading operations to boost their top line figures. Morgan Stanley has had the upper hand in recent years, as the sweeping changes it introduced to its business model over 2011-2012 shifted the focus of its business model away from fixed income trading and towards equities. In sharp contrast, 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 equity trading revenues in any quarter since Q1 2011. The bank was also the only one here to witness a reduction in these revenues year-on-year.

The chart below details the total equity 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.

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 equity 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 period from Q1 2013 to Q2 2015, and has been sorted based on the average equities revenues earned in a quarter.

Goldman and Morgan Stanley stand out in this regard. Goldman generated over $1.8 billion from its equity trading desk on average, which is a little over 20% of the bank’s average quarterly revenues. Taken together with the roughly 30% in revenues it generates from fixed income trading on average, this indicates that trading revenues are responsible for half of the bank’s top line. Morgan Stanley’s equity trading desk put up a near-identical showing over the period, although the revenue share of the equity trading desk is around 21% – the highest among large U.S. investment banks. The chart below captures the size of Morgan Stanley’s equity trading assets over the years and also shows our forecast for these assets.

The other three banks generate roughly 4-5% of their total revenues through equity trading – a result of their more diversified business models, which focus considerably on other financial services offerings including retail banking, commercial banking and even custody banking.

Interestingly, both Goldman and Morgan Stanley have among the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks of around 13%, despite bringing in the most revenue from their equities unit compared to their more diversified competitors. This would suggest that their trading risks are largely balanced – most likely thanks to the sheer volume of trades they execute over any period. Bank of America fares best in this regard, as it has maintained equity trading revenues between $900 million and $1.2 billion over the last ten quarters – with a coefficient of variation of 10%.

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