FICC Trading Portfolio For Largest U.S. Investment Banks Have Grown 50% In 3 Years, And There’s More To Come

by Trefis Team
Bank of America
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Once the single biggest revenue driver for the largest investment banks in the world, FICC (Fixed Income, Currency & Commodity) trading has lost a lot of its sheen in the wake of the economic downturn. Although it is no longer as profitable as it used to be for the investment banks, it remains an important revenue source for them, and is poised for steady growth over coming years. In order to understand the business better, Trefis has analyzed the FICC Trading Portfolio of the 5 largest U.S. Investment Banks in an interactive dashboard. The banks included in our analysis are Citigroup, Morgan Stanley, JPMorgan Chase, Bank of America, and Goldman Sachs. Besides summarizing the trends in this securities trading portfolio over the years, the dashboard includes our forecast for the FICC trading portfolio for each of these banks, and also captures the impact of changes on their Securities Trading Revenues. Additionally, you can see more Trefis data for financial services companies here.

What is FICC Trading?

It includes buying and selling of securities in both cash and derivative instruments for interest-rate products, credit products, mortgages, currencies and commodities. Investment banks usually maintain a portfolio of FICC securities to meet clients’ trading demand. JPMorgan Chase is the market leader in the FICC trading space with average annual FICC trading revenues of $14.5 billion over the last 10 years.

How Has The FICC Trading Portfolio For These Banks Changed, And What Can We Expect Going Forward?

  • The total FICC trading portfolio for the largest banks was $1.2 trillion in size in 2006. It swelled considerably during the run-up to the economic downturn of 2008 and remained elevated through 2009. The figure largely trended lower till 2015 with most of the banks (especially Morgan Stanley) implementing cuts to their FICC trading desks.
  • New Regulations enacted in the aftermath of the 2008 recession have fundamentally changed the global FICC trading industry.
    • Volcker Rule: It prohibits proprietary trading by banks which was one of the main sources of revenue.
    • Dodd-Frank Act and Basel III Capital Rules: They increased regulatory oversight and limited the banks’ ability to use borrowed money for trading.
    • Additionally, regulatory displeasure over commodity trading activities by banks due to allegations of market manipulation also forced many of these banks to exit the commodity trading segment completely.
  • We expect the FICC trading assets to increase with an average annual rate of 2-3% over next five years leading to regain the peak level of $1.3 trillion by 2024. However, FICC trading revenues are expected to grow at a comparatively slower pace and reach $47 billion by 2024 with an average annual growth rate of 1.3%.

How Has FICC Trading Yield Changed Over The Last 10 Years?

Average FICC Trading Yield = Total FICC Revenues of Banks ÷ Total FICC Trading Assets.

  • Average FICC Trading yield was highest in 2009 at 6% due to massive sell-off of FICC trading assets by banks in the aftermath of the subprime mortgage crisis. After all, mortgage-backed securities (MBS) played a big role in triggering the downturn.
  • The yield gradually decreased over 2010-2012 and was around 4.1% in 2012 which was driven by high economic uncertainty in the wake of the European debt crisis and low client activity.
  • The figure recovered over 2013-2015, but spiked to the unusually high level of 5.3% in 2015 as the investment banks reduced their exposure to debt securities due to negative market outlook.
  • The yield decreased in subsequent years to 3.9% in 2018 and is expected to be around 3.6% over coming years.

The green-to-red shading for figures along a column shows the variations in FICC trading asset base and FICC trading revenues for the top 5 US investment banks in a particular year.

Key Revenue Observations Over The Last Decade (2009-2018):

  • Total FICC Trading revenue was highest in 2009 ($78.3 billion) and lowest in 2018 ($43.5 billion). The average annual revenue over this period was $52.5 billion.
  • JPMorgan has shown strongest performance among its peers with highest average annual revenue of $14.5 billion.
  • However, Goldman Sachs recorded highest annual revenue of $21.9 billion in 2009.
  • Morgan Stanley remains the weakest performing bank in FICC Trading with lowest annual revenue of $2.4 billion in 2012 and lowest average annual revenue of $4.8 billion. This can be attributed to the bank’s decision to focus its efforts primarily in the equity trading market (where it is the market leader).

Do not agree with our forecast? Create your own forecast for by changing the base inputs (blue dots) on our interactive dashboard.

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