Banks have had a tough year when it comes to investment banking, with most reporting year-over-year declines in segment revenue somewhere between 40% and 60%. Obviously, 2021's strong investment banking performance has made year-over-year comparisons tough. Equity and debt underwriting have really dried up due to market volatility and lower public and private valuations.
Still, what seems to get less attention is that trading -- a bank segment typically housed inside a corporate and investment banking division -- has held up considerably well and is even up for many banks this year. In fact, trading has shined this year and has been a key bright spot for banks. Let's take a look.
Trading revenue is up for a lot of banks
Many people who talk about investment banking use it broadly, which can make things quite confusing. But investment banking fees are really composed of mergers and acquisitions (M&A) advisory and equity and debt underwriting. M&A advisory involves assisting companies in purchasing other companies or trying to sell themselves.
Equity underwriting involves helping companies raise capital through events such as initial public offerings, while debt underwriting helps companies raise capital through certain debt instruments such as bonds. It's these parts of the investment banking units of these banks that have struggled immensely this year.
Large banks like JPMorgan Chase (JPM 1.44%), Bank of America (BAC 1.70%), Citigroup (C 2.82%), Morgan Stanley (MS 1.81%), and Goldman Sachs (GS 1.59%), however, also have large trading divisions. These business units help institutional traders and corporations trade fixed-income products like U.S. Treasury bonds or derivatives, such as credit default swaps, as well as equities and options.
These trading divisions have performed well thanks to tremendous volatility and uncertainty. That involves many firms repositioning their portfolios or doing more short-term trading, which can lead to higher commissions. Here's a look at how each bank mentioned above has seen revenue from equities and fixed-income trading perform through the first nine months of 2022 compared to the same period in 2021.
| Bank | Fixed-Income | Equities |
|---|---|---|
| JPMorgan Chase | 10% | (2%) |
| Bank of America | 8% | 2.7% |
| Citigroup | 9% | (8%) |
| Morgan Stanley | 21% | 0 |
| Goldman Sachs | 36% | (7%) |
Source: Company earnings materials. Chart by author.
As you can see, fixed-income trading has performed very well this year, while equities trading has been more varied. But again, it's up against a very good performance in 2021.
It also seems that trading revenues will finish the year strong. Marianne Lake, co-CEO of JPMorgan's consumer and community bank, said at a conference on Dec. 6 that total markets revenue quarter-to-date was up 10% compared to the fourth quarter of 2021. At the same conference, Bank of America and Citigroup executives echoed similar sentiments.
Can trading keep the momentum heading into 2023?
Whether it's investment banking or trading, revenue trends from these categories can be hard to predict. Heading into 2022, most bank CEOs had expected trading to normalize.
But given where things stand right now, it appears trading could stay hot. At a conference in September, JPMorgan COO Daniel Pinto noted that the size of the wallet for trading -- representing total fees in the space -- has gone from about $160 billion in 2019 to between $200 billion and $215 billion in each of the last three years.
And Pinto envisions this level holding for the foreseeable future because he thinks there will either be continued volatility in the market or a soft landing for the economy, wherein investors can pile back into stocks, drumming up trading activity.
With investment banking struggling, trading has been a huge bright spot for banks this year. I'm sure bank executives will hope to have trading stay strong and investment banking rebound next year, regardless of what happens to the economy.
