Equities trading revenues in 2006 grew sharply for the second year in a row at the top firms. The 11 major investment banks took in about $53 billion, an increase of 37.5 percent over the previous year. The group dominates trading of cash equities and equities derivatives globally and reaps the lion’s share of the revenues.
The story in 2006 was similar to that of 2005: Growth came from most categories except domestic cash equities. Derivatives, prime brokerage, international and proprietary trading drove results.
Below are summaries of press releases, earnings statements and executive statements from a selection of the bulge firms.
>> Morgan Stanley
Morgan Stanley boosted revenues 32 percent to $6.3 billion last year. The increase came across the board, although the firm highlights derivatives and overseas cash equities. The bank now takes in about 40 percent of its institutional-both fixed income and equities-revenues from overseas. Growth is strongest outside the U.S. Morgan noted its commission revenues increased but were impacted by “intense” competition, particularly in the U.S., as well as the shift to electronic trading. Proprietary trading contributed to growth, while prime brokerage recorded its third consecutive record year. Morgan Stanley is one of the largest prime brokers.
>> Goldman Sachs
Goldman Sachs is still the largest equities trading house. It took in a whopping $8.5 billion last year, up 50 percent. Commissions only grew by 18 percent, though, representing $3.5 billion of the total. Trading gains accounted for $5 billion, an increase of 85 percent. Growth in commissions has been sluggish at Goldman throughout the 21st century, as money managers demand lower rates and the bank pares back its account list. Most customer flow at Goldman is processed electronically. But most sales and trading revenues come from the “high-touch” handling of complex trades.
>> Deutsche Bank
Deutsche Bank saw relatively modest equities growth of 22 percent last year, bringing in about $5 billion. The increase of about $1 billion largely reflected gains in proprietary trading, derivatives and emerging markets. As for cash equities, the firm notes it is not looking to grow market share at the expense of profits. That profitability may not be so great, though. Deutsche also notes: “Margin compression remained significant in more mature flow’ businesses, such as cash equities.”
>> Lehman Brothers
Lehman Brothers had a good year, taking in nearly $4 billion, up 44 percent from 2005. The big bank said gains came across the board, including cash equities. “Our cash business remained strong in 2006,” the company said in a filing with the Securities and Exchange Commission, “due to solid client-flow, higher IPO and secondary market volumes.” Lehman told analysts in the fourth quarter it experienced its second-highest level ever in execution services, or electronic trading. It noted that derivatives and prime brokerage are becoming “important components” of overall growth.
>> UBS
UBS’ revenues charged ahead by about 30 percent last year to $7.4 billion. Equity derivatives, prime brokerage and proprietary trading were the primary drivers. Cash equities also grew, but mostly outside the U.S. Inside the U.S., during the fourth quarter, UBS experienced “lower individual client trading income” on the cash equities front.
>> Credit Suisse
Credit Suisse took in $4.6 billion, an increase of 31 percent over the prior year. In contrast to many of its peers, Credit Suisse credited cash equities for much of its growth. In the fourth quarter, it noted the cash business benefited from increases in worldwide deal activity, stronger secondary markets and its Advanced Execution Services operation, or electronic trading. For the full year, Credit Suisse also did well by convertibles and derivatives. Proprietary trading is not a major component of the revenue mix, according to chief executive Brady Dougan, but will be. The firm is building its prop business slowly and deliberately; it increased its stable of prop traders last year by 60, and now employs 180.
>> Merrill Lynch
Merrill Lynch leapfrogged Morgan Stanley last year to become the third-largest equities house. It grossed $6.7 billion, a stunning 55 percent increase. To be fair, Merrill includes gains from private equity investments in the overall figure. (Most firms do not.) Growth at Merrill last year came from private equity, proprietary trading, derivatives and prime brokerage.
>> Bear Stearns
Bear Stearns is one of the smallest equities shops, reporting about $2 billion in revenues last year. That represented an increase of 33 percent. Driving growth were strong performances in equity derivatives, international equities and risk arbitrage (proprietary trading). Europe, in particular, proved fertile for the firm. Domestic cash equities, however, continues to shrink in importance, representing not much more than one-third of the mix. Bear’s New York Stock Exchange specialist activities saw a decline in revenue last year, the company reported. Bear is the third-largest prime broker and saw its customer balances increase 7 percent to $72 billion. The company reorganized late last year to better serve hedge funds.
