It's supposed to be one of the benefits of working for a large bank with multiple product lines: when things go less well in one business, they go better in another and the feeble business is carried for a while until the situation turns. Even so, Bank of America's investment bankers have reason to feel a little disgruntled with its traders.
As the chart below shows, the top line of Bank of America's investment bank is doing pretty well.
BofA provides results for its global banking (M&A, equity capital markets, debt capital markets, corporate banking and transaction services) division separately to results to its global markets (sales and trading) division. When the two are combined, revenues for BofA's investment bank during the first nine months of this year were only a shade lower than Citi's, and bigger than J.P. Morgan's.
However, Bank of America's combined investment bank is the smallest of the three in terms of profits. How can this be?
Blame the global markets professionals.
As the chart below shows, BofA's global banking division has become more profitable this year. Profits were up 13% year-on-year in the third quarter, and 27% year-on-year in the first nine months as a whole. Costs consumed 70% of revenues in global banking in the first nine months, compared to 73% last year.
By comparison, the global markets division is a lot less profitable than it used to be. Profits plummeted 30% year-on-year in the third quarter, and costs rose from 76% to 81% of revenues. We can now understand why BofA has been laying off some of its traders.
What caused the 30% drop in profitability in BofA's global markets division in the third quarter? Fixed income traders seem the likely culprits: their revenues fell by 22%. In M&A, by comparison, BofA's M&A revenues were up 14%.
The prowess of Bank of America Merrill Lyncy's (BAML)'s) M&A bankers is most evident, however, over the full nine months of this year. Over this period, its M&A revenues increased by more than Citi's and by more than J.P. Morgan's. Meanwhile, it's fixed income and debt capital markets revenues floundered.
To make amends, Bank of America might want to make a few more traders redundant. Last month's trader layoffs at the bank were said to be minor, with only around 10 people going in London.
Unless revenues pick up (which seems unlikely), BofA's human traders need to go to compensate for its increased spending on trading technology. As the chart below shows, costs in the under-performing global markets division rose this year for the first time since 2014 - something which the bank blamed on tech spend. Meanwhile, costs in the global banking division - which houses the out-performing M&A bankers, are being squeezed.
This doesn't seem entirely fair. Yet, rising technology costs are an inevitability for banks that want to stay in the trading game. Even so, BAML's M&A bankers can be forgiven if they decide they're better off quitting and working for a boutique firm with no trading aspirations instead.
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