Q4 2013 U.S. Investment Bank Round-Up: Fixed Income, Currencies & Commodities Trading

by Trefis Team
JPMorgan Chase
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The fixed income, currencies & commodities (FICC) trading business is often the single biggest revenue source in an investment bank’s business model. Investment banks’ overall quarterly results are generally boosted or marred significantly by the performance of their FICC trading desks – a situation made worse by the inherently volatile nature of the business. The year 2013 offers ready proof of this fact, with better-than-expected debt trading results over the first half of the year being followed by weak trading activity over the second half due to uncertainty about when the Fed will implement its tapering plan.

In this article, which is a part of our continuing series to compare the relative performances of the country’s five largest investment banks, we detail the revenues generated by the FICC trading operations at these banks. We also discuss how the FICC revenues at the banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – impact their top-line figures.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The table below summarizes the revenues each of the five largest U.S. banks generated through their FICC trading units for each of the last eight quarters, as well as for the last three years. These figures have been adjusted for gains/losses linked to 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 (see our article Banks’ Debt Valuation Accounting Rules Need A Revision for more detailed information about DVA and its effect on these banks).

(in $ mil) Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2011 FY 2012 FY 2013
JPMorgan 5,016 3,493 3,726 3,177 4,752 4,058 3,439 3,199 14,784 15,412 15,468
Citigroup 4,781 2,861 3,739 2,741 4,623 3,372 2,783 2,329 10,891 14,122 13,107
Bank of America 4,130 2,555 2,534 1,788 3,001 2,259 2,033 2,080 8,103 11,007 9,373
Goldman Sachs 3,575 2,187 2,449 2,117 3,259 2,431 1,294 1,887 8,619 10,328 8,871
Morgan Stanley 2,594 770 1,458 811 1,515 1,153 724 492 4,448 5,633 3,884

The volatile nature of the FICC trading business can be seen in the table above. Over the last three years, quarterly revenues have ranged from gains of $5.1 billion (for JPMorgan in Q1 2011) to a loss of $493 million (for Morgan Stanley in Q4 2011 – the only quarter when any of these banks lost money trading in debt securities over a three-year period).

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 the FICC trading desk in a particular bank’s business model. To facilitate a better comparison, we compiled the following table, which consolidates the figures for the last three years into a single set of average numbers.

(in $ mil) Total Revenues FICC Revenues FICC / Total Std. Dev. Std. Dev./ Mean
JPMorgan 24,239 3,805 15.7% 806 21.2%
Citigroup 18,699 3,177 17.0% 908 28.6%
Goldman Sachs 8,098 2,318 28.6% 966 41.7%
Bank of America 22,144 2,374 10.7% 914 38.5%
Morgan Stanley 7,567 1,164 15.4% 768 66.0%
TOTAL 80,747 12,838 15.9% 5189 40.4%

This table includes the average quarterly revenues each bank reported over the same twelve-quarter period and has been sorted based on the average FICC revenues earned in a quarter. Quite notably, JPMorgan stands out in this regard – generating $3.8 billion from its debt trading desk. This is almost 16% of the bank’s total quarterly revenues – a sizable portion considering the extremely diversified nature of the bank’s operations. The more relevant point here is that despite making more money than any of its competitors by trading in bonds, JPMorgan has the lowest volatility in revenues as shown by the lowest coefficient of variation (ratio of standard deviation and mean) of 21.2% among these five banks.

In terms of importance to the business model, Goldman Sachs’ debt trading unit is on top as it contributes almost 30% of the investment bank’s total revenues on average. These operations are also one of the most risky among those detailed here, with a coefficient of variation of 41.7%.

The considerably smaller size of Morgan Stanley’s debt trading operations also stands out here – although it is important to remember that these operations are still responsible for a sixth of the bank’s total revenues. The bank has been steadily shifting focus from its trading operations to its wealth management division in a bid to draw from the stable revenue stream.

While the last two quarters have seen low debt trading activity, we expect FICC revenues to begin picking up this quarter with the Federal Reserve initiating its tapering plan in January.

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