The New York Stock Exchange on Oct. 13. The prime brokerage business on Wall Street has benefited this year from surging valuations of companies across sectors.Richard Drew/The Associated Press
Wall Street’s multibillion-dollar prime brokerage machinery is firing on all cylinders.
In the latest quarter, the largest U.S. banks led by JPMorgan Chase JPM-N, Goldman Sachs GS-N and Bank of America BAC-N flagged big profits from the booming business of prime brokerage, which involves lending cash and securities to hedge funds to help execute large trades.
The prime brokerage business on Wall Street has benefited this year from surging valuations of companies across sectors, with some banks warning that asset prices may be unsustainably high.
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For now, however, top U.S. lenders are scrambling to grab more market share against each other and European rivals, as trading activity has surged this year due to global market volatility triggered by the Trump administration’s tariff policies.
The number of new hedge funds and the size of existing funds has grown exponentially in recent years, with fund leverage ratios hitting a five-year high earlier this year, Reuters previously reported.
The current push into the business of prime lending comes about three years after Credit Suisse was forced to wind down its brokerage lending operations as the collapse of Archegos Capital Management left the bank nursing billions of dollars of losses.
JPMorgan’s equity markets unit reported a 33-per-cent surge in revenue for the third quarter.Andrew Kelly/Reuters
For the quarter ended Sept. 30, JPMorgan’s equity markets unit reported a 33-per-cent surge in revenue to US$3.3-billion, with strength across products, particularly in prime lending. Morgan Stanley’s MS-N equities revenue surged 35 per cent to US$4.12-billion, driven by record results in prime brokerage, while fixed income revenue rose 8 per cent.
“Prime brokerage revenues drove results as average client balances and financing revenues reached new records,” Morgan Stanley Chief Financial Officer Sharon Yeshaya told analysts on Wednesday.
On a post-earnings conference call with analysts, Bank of America Chief Financial Officer Alastair Borthwick said the second-largest U.S. lender saw strength in its prime brokerage financing business, as revenue increased year-over-year.
Citigroup C-N CEO Jane Fraser told analysts on Tuesday that it is doubling down on prime lending services, given the revenue growth potential of the business.
In the latest quarter, Citi’s prime balances surged 44 per cent, boosting revenue from its equity markets business, which jumped 24 per cent to US$1.5-billion.
On Tuesday, Goldman Sachs posted a 7-per-cent rise in revenue from its equities business to US$3.74-billion, driven primarily by higher net fees generated from equities financing, which includes its prime lending business.
“Balances are very correlated with overall levels in the markets, which is an attractive feature of the [prime services and financing) business,” said Goldman CFO Denis Coleman on a call with analysts.
“It has been, together with FICC financing [fixed income, currencies, and commodities], a good source of stable revenues for us across the franchise,” he said, adding that the bank was seeing robust demand from hedge fund clients on prime brokerage services.