Why You Should Be Happy That Bank of America’s Trading Revenues Are Down

Excluding a one-time charge from last year, Bank of America’s FICC trading revenues are down 15%. Here’s why I’m optimistic.

Apr 22, 2014 at 6:15AM

Rocking
Source: Flickr / Anne Worner.

Bank of America (NYSE:BAC) posted a 15% drop in trading revenues (excluding a one-time charge from 2013), and I for one am happy about this news.

While fixed income, currency, and commodities trading (or FICC) has been a major revenue engine for banks over the past two decades, it has not been good for banking or the financial industry as a whole. Thus, a change to the structure of banking that involves less FICC would be a good change in my book.

What is FICC again?
FICC involves trading in both assets and derivatives, so it covers quite a lot of, well, trades. Over the past 20 years it became an increasingly significant source of income for large banks, and recent activity has remained relatively strong, depsite the recent decline.

The problem with FICC lies both its volatility (of all bank activities, trading is easily the least predictable) and in the short-term focus it encourages. While banks can make enormous profits on trading one day, the overall trend is that it produces worse average returns for banks in the long run.  

FICC is attractive not for its long-term contribution to the growth of a bank, but for the breathtaking possibilities of a major win right now. As for the potential for disaster, one need only look at the financial crisis (remember Bear Stearns?). For a more recent example of the downsides, consider the London Whale and his $6 billion loss... in one day. 

FICC today
Bank of America is in good company for its poor first quarter. Citigroup's first quarter FICC revenue fell 18%, and JPMorgan's fell 21%. Even Goldman Sachs, which illustrated its long-standing passion for trading by appointing a former trader as its CEO in 2006, posted a 13% drop in FICC.

Why are things so glum? There are several factors. In the past few years, rule changes came down with the specific intent of curbing trading activities, most notably a restriction (in the U.S.) on banks trading for their own accounts. By outlawing this practice, banks can only profit off the success and failure of their customers, which I think we can agree is pretty reasonable.

There are other significant pressures on the FICC business. Stronger capital requirements have encouraged banks to shift assets and hold more in reserve, and the recent scandals in forex and Libor may have further cooled the market. More recently, very low volatility in the markets has simply made trading less profitable and thus less attractive to clients.

All in all, it's gotten to the point where the Financial Times is asking if we're about to see a resurgence in traditional investment banking. 

What happens next
It is of course entirely possible that the recent lull in FICC is temporary. More changes are coming, however: According to the Fed, capital requirements will not be getting any looser, and there is discussion among regulators about moving derivative trading activities onto electronic exchanges that would further reduce margins trading.

All that being said, I'm happy that trading revenues are down. May they continue their downward spiral. Maybe it will inspire a change in resource allocation to, well, banking. 

Either way, Bank of America is still facing a lot of headwinds in the form of regulatory and legal action, so things are not going to be easy anytime soon no matter how much trading it does. Still, I would love to see the bank's executives take a deep breath and shift resources back to the basics of being a good commercial bank instead of chasing returns and volatility. We've seen banks rise and fall from FICC; today, the real sex appeal would come through being just a bit more boring.

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Anna Wroblewska has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers