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Banks are on track to generate their highest annual trading profit since 2010, as equity derivatives and credit deals help the business.
The industry is expected to bring in nearly $225 billion in trade revenues by 2024, according to performance estimates from more than 250 banks by Coalition Greenwich, a business research group.
This figure would slightly surpass the blockbuster $224bn earned in 2022 when Russia's all-out invasion of Ukraine rocked financial markets, and mark the best year for bankers since 2010 when they made $226bn.
Flexibility before the US election and about the release of the so-called yen selling trade has helped to increase the trading profit higher than Wall Street analysts and investors expected.
But banks have also reaped huge profits from the securitization trade, fueled by the highest level of emissions since 2007while the rebound in the equity capital markets activity supports the trading of equity derivatives.
“Combined market earnings for banks are stronger than we had predicted in early 2024,” said Mollie Devine of Coalition Greenwich.
“Following the high water mark of 2022. . . Ending in the same position (that year) is considered a good result for banks and better than expected.”
The latest figures show how Wall Street's stock market has rebounded in the five years between 2014 and 2019, even as they face growing competition from electronic trading companies such as Citadel Securities and Jane Street.
Big five investment banks they are on track to generate $112 billion in trading revenue by 2024, according to estimates compiled by Bloomberg, and surpass that by 2022.
Analysts estimate that the total annual income of fixed income and trading equities at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup will increase by 6.1 percent from 2023.
Of the five largest US investment banks, only BofA is expected to earn more trading income in 2024 than in 2022 and 2023 – despite having the smallest total. Jim DeMare, who runs BofA's business, is seen as a likely candidate to succeed Brian Moynihan as chief executive.
The end of the last decade was marked by low market volatility, low interest rates, and high administrative and technological costs. Banks benefit when rates rise instead of moving slowly in one direction.
Trading activity has been boosted by the Covid-19 pandemic, which has marked the return of extreme market volatility, as well as political issues such as Ukraine, and the rise in interest rates.
Big banks have benefited from rival layoffs in the brokerage business – including Deutsche Bank exit from the equities market and the destruction of Credit Suisse – which allowed those who remained to hold more businesses.
“The top four or five (banks) have bigger market shares today than 10 years ago,” said Gerard Cassidy, a banking analyst at RBC.
Banks aim to finance primary trading activity in equities and lending to private investment firms in fixed income, which shareholders value as more sustainable businesses.
Unlike in 2022, when trading income was driven by movements in commodities and large trades, equity, credit and security derivatives were the main focus areas in 2024.
Investors are accustomed to placing high prices on many trades because of the lack of predictability.
“In 2019 we have had discussions with some clients about scaling back or exiting low return businesses such as commodities and cash. “The conversation has changed,” said the Coalition's Devine.
“Our customers don't expect a drop any time soon in their Covid-19 sales revenue levels.”