The point of this blog is to first provide some basics on derivatives and then begin commenting on current events where these financial instruments loom large. But, seeing as third quarter earnings for the banking sector are trickling in, I can’t resist a brief detour. Below is the round up so far:
Some banks are making money
JP Morgan: $3.6 billion
Goldman Sachs: $3.2 billion
Others not so much
Bank of America (or is it Banc of America?): -$1.0 billion
Citigroup: -$3.2 billion
But I don’t care about these top line numbers since they reflect the sum total of a wide range of businesses, many of which I know nothing about. I am interested in trading results, and you may be too.
Revenue from non-equity (bonds, currencies, and commodities) and equity trading units
Goldman: $6.0 billion (non-equity) + $2.8 billion (equity) = $8.8 bn
JP Morgan: $5.0 billion (non-equity) + $0.9 billion (equity) = $5.9 bn
B of A: $4.4 billion (non-equity) + $1.4 billion (equity) = $5.8 bn
Citi: $3.9 billion (non-equity) + $0.4 billion (equity) = $4.3 bn
Not surprisingly, Goldman has turned in the strongest trading results however you cut it. Somewhat surprisingly (given the amount of negative attention the Merrill Lynch acquisition produced), Bank of America is right up there with JP Morgan, thanks to Ken Lewis’ corralling of the thundering herd. The Merrill purchase may have sent Lewis packing, but it has made Bank of America’s once laughable sales and trading franchise a force to be reckoned with, particularly on the equity side.
At this point, I don’t even think Vikram Pandit would disagree that Citigroup is now the clear sales and trading laggard among the full-service banking troika of Bank of America, Citigroup, and JP Morgan. Thankfully, I dumped Citigroup stock when it was at $50 – I don’t expect it to return to that level in my lifetime.
Yet, even Citigroup’s non-equity numbers aren’t half bad if you consider where we were just a year ago. Of course, Q3 2008 was an absolute shit show as the financial world all but collapsed in September 2008 (the end of Q3 for all financial institutions except the soon-to-be-extinct pure play investment banks Goldman Sachs and Morgan Stanley)
Q3 2008 revenue from non-equity and equity trading units
Goldman*: $1.6 billion (non-equity) + $1.6 billion (equity) = $3.2 bn
JP Morgan: $0.8 billion (non-equity) + $1.7 billion (equity) = $2.5 bn
B of A: -$0.4 billion (non-equity) + $0.2 billion (equity) = -$0.2 bn
Citi: -$2.4 billion (non-equity) + $0.5 billion (equity) = -$1.9 bn
*Goldman’s quarter ended August 29, 2008, not September 30, 2008, unlike that of the other three banks.
It’s interesting to note that at least by sales and trading revenue, the ranking of the four banks in Q3 2008 was the same as that in Q3 2009 and the gap between highest and lowest was quite similar (nearly $5 billion in each case).
Clearly, 2009 has been a much better year for banks in general, and in subsequent posts, I will go into some of the reasons for the turnaround. One thing that stands out, or rather no longer stands out, is the write down issue. Now that banks are no longer marking down billions worth of credit-related assets, they are actually printing some serious cash on the non-equity front. Given the significance of fixed income write downs in 2008, the non-equity side has been the clear driver of the performance difference between this year and last for every bank on the list. In fact, even during the heart of the credit crunch last year, some banks were then reporting stronger equity numbers than they are now.
I have a lot more to say on this matter and am curious to see what Morgan Stanley reports on Wednesday, October 21. My guess is that they will land somewhere between Bank of America and Citigroup in sales and trading revenue. Though Stanley has dialed down the risk and won’t come close to Goldman on the trading side any time soon, this should be their first positive earnings quarter of the year – cause for at least a modicum of celebration at 1585 Broadway.
Of course, Mack and his cronies won’t be able to do all that much in the way of celebrations. With the government still claiming to be scrutinizing the pay practices of banks, no institution will be popping the champagne corks – at least in public. But, Q3 2009 results, coming after strong Q2 numbers, will no doubt be cause for more muted revelry on Wall Street.
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