Five Largest U.S. Investment Banks Have $1.54 Trillion In Securities Trading Assets, And The Figure Is Increasing Fast

The securities trading industry fell out of favor in the wake of the economic downturn, as stricter regulatory requirements coupled with restrictions to proprietary trading activity, forced major investment banks globally to implement sizable cuts to their trading portfolio. But it looks like the five largest U.S. investment banks have been refocusing their efforts in the capital-intensive industry over recent quarters, as is evident from the fact that their combined securities trading portfolio was almost $1.54 trillion at the end of 2017 – up nearly 15% from the figure of $1.34 trillion at the end of 2015. And given upbeat market conditions and the strong outlook for the U.S. economy, this figure is likely to grow rapidly over the foreseeable future.

We capture the trends in securities trading assets for each of the five largest U.S. investment banks – Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup – through interactive dashboards while also detailing the impact of changes in these assets on their share price.

The figures here have been compiled from the annual reports of individual banks over the years, and represent the sum of trading assets as well as derivative assets on their balance sheet at the end of a period. While there was a steady decline in the trading portfolio over 2011-15, the trend has reversed sharply over several quarters now thanks to a combination of:

• Improvement in asset valuation: The Fed’s ongoing rate hike process improved the interest rate environment, while strong economic indicators resulted in the U.S. equity market scaling record highs
• Strong capital buffers for the largest banks: Although the largest U.S. banks implemented notable cuts to their trading desks to comply with stricter capital requirements, strong operating performances over the years, coupled with prudent payouts to shareholders, have helped these banks build a strong capital buffer. This has helped them divert free capital towards their trading desks over recent years.
• Improving market share from shrinking European rivals: Another key factor that has worked in favor of U.S. investment banks is the fact that many of their European peers (like Deutsche Bank, Barclays, RBS, UBS and Credit Suisse) have either done away with huge chunks of their trading businesses, or are still in the process of reshaping their business models. This has helped the U.S. investment banking giants step in to fill the gap created in the European securities trading industry.

The table below captures the ratio of trading assets to total assets for each of these banks since 2013, and highlights the relative importance of securities trading to their respective business models. The red-to-green shading along a row makes it easy to visualize how this ratio has changed for a particular bank over the period.

Trading assets constitute around one third of the total balance sheet for Goldman Sachs and Morgan Stanley, and roughly 16% of the total assets for JPMorgan, 14% for Citigroup and 11% for Bank of America (despite the significantly diversified business model for the latter three).

Notably, the jump in the ratio for JPMorgan in Q1 2018 stands out, and is because of the sharp increase in value of debt trading securities over the period – something that had a positive impact on the trading portfolio of JPMorgan, Goldman Sachs as well as Citigroup, as their business models rely more heavily on FICC trading. On the other hand, Morgan Stanley’s focus on equity trading resulted in its trading assets shrinking considerably in Q1 due to the decline in equity market values over February and March.

However, with the Fed holding a hawkish outlook for interest rates over the rest of the year, and with the equity market resuming its rally over the last couple of months, the total trading assets for all these banks should nudge higher – possibly crossing $1.55 trillion by the end of Q2 and $1.6 trillion by the end of the year.

Details about how changes to Securities Trading Assets affect the share price of these banks can be found in our interactive model for Goldman Sachs | Morgan Stanley | JPMorgan Chase | Bank of America | Citigroup

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