Earnings reports from major investment banks are showing continued improvement in the equities environment during the first quarter of 2014. The longer term trend also suggests a more stable context for equity research.
Quarterly equities growth
Bank of America, Morgan Stanley, Credit Suisse, and JP Morgan have reported sequential growth in their equities revenues and all except JP Morgan had higher equities revenues than the first quarter of 2013. Citigroup was the outlier. Although its overall earnings report was well received, its equities business is down 12% relative to comparable quarters.
Goldman Sachs equity revenues were also down in aggregate, which it explained as the result of the sale of its reinsurance business and lower derivatives revenues. However, its commission revenues were up 4% compared to the first quarter of last year and 11% sequentially.
The average for the banks reporting so far shows slight growth over the first quarter of 2013 and a robust 21% uptick from the fourth quarter. Still to report: Barclays, Deutsche Bank and UBS.
Commissions as a component of equities
Unlike its competitors, Goldman provides detail on the components of its equities revenues. Its report of equity commission revenues excludes the ‘noise’ from other equities products less directly related to investment research. This is a reminder that although overall cash equities revenues are the best metric we have, it isn’t a perfect proxy for commission revenues.
The negative press surrounding high frequency trading has led to speculation that banks may be under pressure to close their dark pools. Goldman’s CFO told analysts that there were “no strategic plans” to close its Sigma X pool during the first quarter conference call. Closure of dark pools would negatively impact overall equities revenues, but not commissions revenues tied to investment research.
Looking at the longer term trend in equities revenues for one of the top equities houses, Credit Suisse, we see a near doubling of equities revenues in the run up to the financial crisis followed by an equally quick decline. By 2011, Credit Suisse’s equity revenues were back to 2005 levels. However, since then equities revenues have stabilized and show moderate growth (10%) in 2013. (Note: CHF = 1.13 US$ and has trended around $1 US.)
The quarterly revenue picture is more complex, but has a similarly encouraging picture of an improving near term trend. The quarterly revenues also show decreasing volatility, which is the trend across all the major investment banks.
The quarterly pattern also suggests some seasonality to the revenues with stronger revenues earlier in the year and weaker results later in the year.
Overall, it is premature to break out the champagne. Not all banks have reported yet, so the picture could alter. More importantly, past experience tells us that equity revenues are volatile and a strong first quarter does not necessarily presage a strong year. Nevertheless, the general trend suggests a generally more stable equities environment, at least for the leading equities players, which is a positive for the research segment.