We assess prime broker estimated revenues for 2014 from physical financing and margin. We build on the methodology for finding prime brokerage revenue first published in “Which prime brokers are making the most money in securities lending?”, September 2013. This analysis includes further thinking about the value of internalization and the role of synthetic financing. There are some new winners in this year’s numbers. But in a declining physical market, is anyone really a winner?
Based on revenues from physical securities loans and margin financing, Morgan Stanley will be the market leader in 2014. Our data show MS with US$645 billion in physical financing revenues in 2014, or 16% of the total. Not surprisingly, JPM and Goldman Sachs are second and third, respectively. The news here is that for 2012, Goldman was #1. We’ve heard some talk about MS reporting that they are “huge” in the financing space this year. The data support their argument.
Prime Broker Physical financing revenues – 2014 estimated (US$ billions) 2012 Rank
Morgan Stanley 645 4
J.P. Morgan 604 3
Goldman Sachs 600 1
Deutsche Bank 572 5
Credit Suisse 442 2
Citi 319 6
BofA Merrill Lynch 308 7
Barclays 277 8
UBS 226 9
We see a real decline in physical financing revenues from 2012 to 2014. Across nine banks, total 2012 revenues were US$5.2 billion. In our projected 2014 figures the estimate is US$4 billion, a 24% decline. Does this mean bad times for prime brokers? Not at all. In 2012, total equity sales and trading revenues across these banks was US$27.8 billion; 2014 numbers are looking closer to US$34.7 billion, a 20% increase. Although physical financing is facing some headwinds, these banks are doing quite well overall.
We looked closely this year at the value of internalization to prime brokers. Our numbers still are not as tight as we would like them to be and so will not publish them yet. However, the new 50% charge for internalized loans and borrows that prime brokers will soon be assessed has many of them pushing ever forward to making clients self-finance their positions. The new 50% capital charge either needs to be passed on to the client, increasing fees all around, or the client needs to change their financing strategy. This year we reviewed prime broker disclosures of gross and netted securities lending positions. We know for example what amounts prime brokers are owed by clients from Statements of Financial Condition. We know what the gross amounts of repo and securities loans are and what is netted off. This gets us close but is not yet an accurate representation of the value of internalization for each PB.
Another issue we discussed last year was not knowing which revenues were from Delta One/synthetic financing vs. which were from physical financing. We have some work to be published shortly with SunGard that splits these revenues out of the equity sales and trading pool. We’ll provide a link to that report when it becomes available.
