The Office of the Comptroller of the Currency (OCC) said on Friday that Trading Revenues at U.S. commercial banks soared 328 percent in the first quarter, compared to the fourth quarter of 2009. Improving credit markets is cited as a major reason, allowing the banks to benefit and participate in the rebounding markets.
Revenues from trading derivatives and cash securities rose to $8.3 billion, from $1.9 billion in the fourth quarter, when uncertainty over pending derivatives legislation and a seasonal slowdown in trading dampened earnings. They fell 15 percent from a record $9.8 billion generated in the first quarter of 2009, the OCC said.
Citigroup (NYSE: C), JPMorgan (NYSE: JPM), and Bank of America (NYSE: BAC) have built their empires on trading. Contraction in the markets during 2008 and 2009 caused them to slash dividends, and cut headcount multiple times. The rebound in trading revenue may signify an important turnaround. As confidence returns to the market, investors may as well, fueling a bull market.
The OCC went on to say that Credit trading in the quarter generated $2.7 billion, the strongest result since banks began reporting the credit separately in 2007. To contrast this, banks lost $3.2 billion from credit trading in the first quarter of 2009, and earned only $27 million from the asset class in the fourth quarter of 2009.
In regards to the trading of derivatives contracts, this activity remains highly concentrated. The largest five banks account for 97 percent of overall exposure and 86 percent of net credit exposure, the OCC said.
According to the OCC, as of March 31, the nation’s largest commercial banks have the following notional derivative exposure:
JPMorgan Chase & Co (NYSE: JPM): $76.46 trillion
Bank of America Corp (NYSE: BAC): $46.64 trillion
Citigroup Inc (NYSE: C): $41.12 trillion
Goldman Sachs (NYSE: GS): $41.12 trillion
Wells Fargo & Co (NYSE: WFC): $3.76 trillion
Derivatives trading is one of the most profitable activities for banks. U.S. lawmakers late on Thursday passed rules that will allow banks to continue trading interest rate derivatives, the largest privately traded derivatives market, in their main banking unit. Derivatives take their value from underlying assets such as bonds, currencies or commodities, or can be tied to changes in interest rates. With trading revenue turning around, this could be an important turning point for the industry, as long as they can avoid a risk exposure meltdown similar to 2008.
