Q1 2015 U.S. Investment Banking Round-Up: Equities Trading

18 May, 2015 (12:36) | Blog | By: admin

Trefis Team , Contributor

The first quarter of the year is usually the best period for global investment banks in terms of equity trading revenues due to the notable increase in activity over the first three months of a year. This was definitely true for Q1 2015, but the banks also benefited this time around from the sudden increase in market volatility from the Swiss central bank’s unexpected move to remove the cap on the Swiss franc. The combined effect of all these factors made the quarter one of the most profitable ever for investment banks in terms of equities trading revenues.

In this article, which is a part of our ongoing series on the largest U.S. investment banks – Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America-Merrill Lynch and Citigroup – 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.

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 nine 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.

(in $ mil) Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
Goldman Sachs 1,957 1,823 1,641 1,725 1,596 1,588 1,573 1,904 2,337
Morgan Stanley 1,594 1,806 1,710 1,503 1,705 1,789 1,784 1,625 2,268
JPMorgan 1,340 1,296 1,249 873 1,315 1,189 1,252 1,105 1,609
Bank of America 1,149 1,194 970 904 1,153 1,032 1,026 911 1,150
Citigroup 826 942 710 539 883 659 763 471 873

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 for every single quarter in the last four years. 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 was held by Morgan Stanley in six of the seven quarters until Q3 2014. Goldman regained the top spot in Q4 2014, and held on to the position in Q1 2015 as well.

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 over 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 trading. 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 equities trading revenues in any quarter since Q1 2011.

While all the banks detailed here reported a strong improvement in equities trading revenues compared to the slow Q4 2014, Citigroup and Bank of America saw a year-on-year reduction in these revenues (albeit a small one). Taken together, these five banks made over $8.2 billion in equities trading revenues in Q1 2015 – a 24% increase from the $6.65 billion figure in Q1 2014, and a good 37% higher than the total figure of $6 billion for Q4 2014. The chart above, which shows the total equities trading revenues for these five banks in each quarter since Q1 2015 shows just how strong the performance for this quarter was. Not only was the combined performance for these banks the best since the economic downturn, but it was also the third highest revenue figure in history.

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.

(in $ mil) Total Revenues Equities Revenues Equities / Total Std. Dev. Std. Dev./ Mean
Goldman Sachs 8,817 1,798 20.4% 231 12.9%
Morgan Stanley 8,504 1,754 20.6% 205 11.7%
JPMorgan 23,875 1,248 5.2% 186 14.9%
Bank of America 21,599 1,054 4.9% 105 10.0%
Citigroup 19,220 741 3.9% 152 20.5%
TOTAL 82,015 6,595 8.0% 719 10.9%

This table includes the average quarterly revenues each bank reported over the nine-quarter period from Q1 2013 to Q1 2015 and has been sorted based on the average equities revenues earned in a quarter. Goldman Sachs stands out in this regard – generating just under $1.8 billion from its equities trading desk. This is a little over 20% of the bank’s total quarterly revenues – comparable to the roughly 30% in revenues it generates from fixed income trading on average. Morgan Stanley’s equities trading desk put up a near-identical showing over the period, with average revenues of $1.75 billion each quarter contributing 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. 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 roughly 4-5% 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 among the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks of around 14-15%. This would suggest that their trading risks are largely balanced, most likely thanks to the sheer volume of trades they execute over any period. Notably, Bank of America fares better than the other banks in this regard, as it has maintained equities trading revenues between $900 million and $1.2 billion over the last nine quarters – allowing its coefficient of variation to remain at the lowest figure of 10%.

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