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Why BAML looks weaker than J.P. Morgan in 2015

J.P. Morgan's investment bank looks a bit more powerful

Yesterday J.P. Morgan released its second quarter results. Today is the turn of Bank of America. Guess which investment bank did best in Q2? It was not Bank of America Merrill Lynch (BAML).

Bank of America's IBD business did worse than J.P. Morgan's 

Banking information provider Coalition puts J.P. Morgan's investment bank in the top slot worldwide. It puts Bank of America's investment bank in the third slot. The reason for this was in evidence in the first half of 2015.

Both BAML and J.P. Morgan had an excellent first six months in M&A advisory work: revenues at both banks rose 29% year-on-year. However, while J.P. Morgan achieved a 3% increase in equity underwriting revenues and a 7% increase in debt underwriting revenues in the first half, at BAML revenues in each business fell by 12% and 15% respectively.

Bank of America's FICC business did worse than J.P. Morgan's

J.P. Morgan reiterated yesterday that this is turning out to be a bad year for credit traders.

As the chart below (taken from Bank of America's presentation) shows, BAML's fixed income currencies and commodities (FICC) business is disproportionately exposed to the struggling credit business and weaker in the comparatively stronger macro (rates and FX) businesses. This might be why revenues in BAML's FICC business fell 9% in the first half while revenues in J.P. Morgan's FICC business fell by 'just' 7%.

BAML FICC business


Bank of America's equities sales and trading business did worse than J.P. Morgan's  

Nor did Bank of America's equities sales and trading business do much to close the gap. At J.P. Morgan, equities revenues rose 23% year-on-year in the first half. At BAML they were up...5%.

BofA's markets business is becoming less, not more profitable

Much has been made of BofA's cost cutting in the second quarter. Across the bank, full time employees fell from 233,000 to 217,000 as the bank cut 'support staff and infrastructure.'

There wasn't much sign of cost cutting in the markets business, however. In the first half of 2014, markets had a profit margin of 25%. In the first half of 2015, this was down to 22%. Return on capital fell from 14% to 11% over the same period.

In December, BofA CEO Brian Moynihan noted that banks are having to spend more and more on technology just to stay competitive in sales and trading. Is this what's dragging BofA's profits down?

But, BofA also benefited from Chinese equities oscillations.... 

Yesterday, J.P. Morgan said the plummeting Chinese equities market had been good for revenues. Today, BofA said much the same, attributing increased equities revenues in the second quarter to, 'increased client activity in the Asia-Pacific region.'

And BofA hasn't done much to cut the capital allocated to its trading business...

The other piece of good news, if you're a trader, is that BofA isn't doing much to crimp your style. While other banks are heavily trimming capital allocated to their trading businesses, BofA is tinkering around the edges. VaR is up too, suggesting increased willingness to take risk - and that's generally a good thing if you work in trading.

(Photo credit: Geronimo De Francesco) 

AUTHORSarah Butcher Global Editor

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