What's a room full of traders worth?
To Bank of America, the answer is about $1.6 billion in net income just last year.
Looking at the trading desks
Global Markets thrives on trading revenue. Last year, trading account profits made up the largest slice of the company's revenue net of interest expenses. This has been the case for several years running, even in a post-Dodd-Frank environment.
The Global Markets business also follows the investment banking business in Global Banking. Bank of America allocates the bulk of advisory revenue to Global Banking. However, fees and commissions earned in brokering new deals mostly flow to Global Markets.
Global Markets isn't your average banking asset. The biggest driver of earnings is trading account profits. Total loans and leases make up just over 10% of the unit's total assets, and roughly 20% of net revenue.
The death of FICC
In the last year, we've heard time and time again that trading is dead. Revenue earned from FICC -- Fixed Income, Currencies, and Commodities -- is on a downward trajectory. Analysts have slashed their expectations for many of the bigger banks.
As always, though, these projections extrapolate today's industry realities into the future. And while the markets are benefiting from lower volatility, which hurts trading profits, this won't always be the case.
After adjusting for one-time events, Bank of America's Global Markets did see a year-over-year decline. Rival JPMorgan (NYSE:JPM) forecasts a 20% decline in FICC revenue for the second quarter. Goldman Sachs' (NYSE:GS) 13% decline in FICC revenue adds another data point that maybe traders are hitting a wall.
A bad business?
Trading can be a great business, but profitability largely hinges on volatility. You can't make much trading if asset prices merely stagnate.
Forecasting profitability for a trading outfit is about as much as a crapshoot as anything. But in the last three years, profits have topped $1 billion annually at Bank of America's Global Markets.
So what's it worth? A good comparable is Goldman Sachs, which trades at about 10.5 times trailing earnings. Though Bank of America's Global Markets probably isn't a Goldman Sachs, its Global Markets unit is deserving of a similar, but lower, multiple of earnings. A multiple of 9 times earnings seems fitting.
Excluding a one-time tax charge of $1.1 billion in 2013, Global Markets would have generated profits in the neighborhood of $3 billion. Thus, a multiple of 9 times earnings gives Global Markets a value of about $27 billion.
The fact of the matter is that volatility is gone today, but tomorrow is a different day. There's little reason to discount what is otherwise a great business for one or two quarters of lower profitability. And while results will vary from quarter-to-quarter, over a cycle, Global Markets is probably too cheap at just 9 times earnings.
For Jordan's full Bank of America analysis and total valuation number, click here.