Despite posting a 14.5% decline in derivatives volume, Bank of America bucked the trend among dealer banks in the fourth quarter by increasing trading revenue.
Bank of America's increase in trading revenue came largely as a result of its foreign exchange trading activities, which rose 146.2% to $32 million for the quarter, according to call report figures released last week by the Office of the Comptroller of the Currency. Overall trading revenue was $187 million, an 8.7% jump from the third quarter.
According to the Comptroller's Office summary of derivatives and trading activities, many banks reported declines in both derivatives trading revenue and volume. Among the six largest dealer banks, only Morgan Guaranty Trust Co. reported an increase in the notional amount of derivatives contracts outstanding during the quarter.
Revenues from derivatives trading dropped 20% across the industry during the fourth quarter, to $1.6 billion.
That decline was expected by some analysts. The trading total includes revenues from bonds, stocks, and currencies, as well as commodities and other derivatives contracts.
Trading activity dragged during the second and third quarters as a result of stable interest and exchange rates.
Seasonal factors reduced fourth-quarter trading earnings, but the results were still strong compared with the fourth quarter of 1994, said Diane Glossman, an analyst for Salomon Brothers. "1994 was not an easy year for trading and the fourth quarter last year was not a real barn burner for most of these banks," she said.
Regulators have tracked individual banks' trading activity only since March of 1995. But it is clear that fourth-quarter 1995 trading revenues were up compared with the fourth quarter 1994 level. Individual banks' revenues were greater in the 1995 quarter than their holding companies' revenues were in the earlier period.
For example, the $178 million generated in the fourth quarter of 1995 by Chemical Bank was nearly four times the $45 million reported in trade revenues reported by its holding company, Chemical Banking Corp., for the same period of 1994. The company's results in the last quarter of 1994 were hurt by a fraud loss on the Mexican peso.
The stability that stifled trading also helped cause a decline in the notional amount of derivatives contracts at yearend for most banks.
Notional amounts represent the value of the underlying transactions upon which derivatives contracts are based. The actual risk - or credit exposure - of a derivatives contract is the amount one party would lose if the contract was broken by its counterparty.
As volatility in interest rates and exchanges rates subsided, banks that had used derivatives to hedge their balance sheets allowed existing contracts to expire and did not replace them.
Citibank, whose $2.3 trillion in derivatives volume ranked third at yearend, reported a 10.2% decline from the third quarter. Chase Manhattan also reported a reduction of 11%.
Morgan's 2.5% increase in derivatives volume during the quarter gave the Wall Street bank just over $3.4 trillion in the notional amount of derivatives contracts outstanding at yearend. The increase, combined with a 5.9% decline at Chemical, allowed Morgan to overtake Chemical for the No. 1 ranking in derivatives outstanding among individual banks.
Chemical's corporate parent, Chemical Banking Corp., was able to retain its first-place ranking among bank holding companies. Despite a 5.8% decline in notional volume from the end of the third quarter, the company's $3.4 trillion derivatives book remained $3.3 billion above J.P. Morgan's yearend outstandings. Its merger partner, Chase Manhattan Bank, reported an additional $1.3 trillion in notional volume at yearend.
First Union Bank of North Carolina made the biggest move in its derivatives operations during the quarter. The Charlotte-based bank recorded a 55.9% increase in notional amounts outstanding, to more than $85 billion. The increase pushed First Union to the No. 10 spot in the ranking of derivatives outstandings.
The bulk of the increase came in exchange-traded futures contracts, which rose 352.2% during the quarter, to $34.7 billion. By comparison, Chemical Bank ranked first in this kind of contract, with more than $301 billion.
"By far the largest amount of activity was for balance sheet management purposes," said John Peters, a senior vice president in First Union's balance sheet management division.
He said the bank added $24 billion in Eurodollar futures contracts to reduce the asset sensitivity of its balance sheet. He said futures contracts are cheaper and give the bank more flexibility than swaps contracts would, even though the same goal could have been accomplished with $6 billion in notional amount of swaps contracts.
The bank also recorded a jump in the ratio of total credit exposure to risk-based capital. The ratio at yearend stood at 93.8%, compared with 20.5% at the end of the third quarter.
Still, First Union's exposure was well below the ratios generated by the biggest dealers.
Morgan's exposure ratio at yearend rose to 565.8%, compared with 502.4% at Sept. 30. Chemical's exposure fell during the period to 283.8%, from 291.3% at Sept. 30. Likewise, Bankers Trust Co. reported a decline to 422.6% during the quarter, from 475.5%.