By Anirban Sen
NEW YORK, July 15 (Reuters) - Wall Street's prime brokerage engine is humming and delivering handsome gains for the largest U.S. banks.
As the largest U.S. banks reported blockbuster profits this week, financiers earned bumper fees from lending to the world's most prominent multi-strategy hedge funds that rode on market volatility to produce big returns during the first half of the year.
Wall Street powerhouse Goldman Sachs witnessed a record quarter for its prime business. Equity financing
revenue skyrocketed 91% from a year earlier, driven by strong growth in Asia, resulting in record average prime balances for the bank. Across its fixed income, currencies, and commodities (FICC) & equities businesses, financing revenues jumped 62% to $4.5 billion, accounting for about 37% of total FICC and equity revenues for the bank.
"Client activity was particularly strong in Asia, driven in part by robust AI capital formation and investment. This strength also extended into financing where we generated another quarter of record revenues as we deployed our balance sheet to support clients with average prime balances rising to another record," said Goldman CEO David Solomon.
Goldman CFO Denis Coleman said the bank identified Asia as a strategic growth area for its prime business.
"We made the decision to start ramping that up in the first quarter, which gave rise to questions as to (whether) we could sustain that investment," Coleman told analysts on Tuesday. "We have revenues that are resulting from those investments that we made, and we're entering the second half with a capital cushion that's even larger."
"In the case of prime ... there continues to be far more demand across the client segment than we're willing to engage when we sort of balance our objectives of serving our clients, driving market share but also being balanced, diversified and focusing on risk management," Coleman added.
At JPMorgan Chase, revenue from its markets business surged 35% during the June quarter, driven primarily by the equity markets unit — which houses the prime brokerage business — that raked in $6 billion, up 86% from the same period last year.
"Flows were strong and trading was favorable in both derivatives and cash — and prime benefited from higher client activity and balances," said Jeremy Barnum, chief financial officer at JPMorgan, on a post-earnings conference call with analysts.
BLOCKBUSTER BUSINESS
Over the past few quarters, Wall Street's biggest prime brokerages have been buoyed by surging valuations, tailwinds from AI demand, growth in regions like Asia, and a spate of record-breaking equity issuances.
For instance, SpaceX's recent $86 billion share sale triggered big demand from large institutional investors and hedge funds that scrambled to lock in sizable allocations.
Morgan Stanley, which alongside Goldman led the SpaceX offering, also raked in big gains from its prime brokerage unit, driven by higher average customer balances and robust growth in Asia, the bank said on Wednesday.
"I can tell you that there is a lot of demand for that capital inside the four walls of our global firm," said Morgan Stanley CEO Ted Pick. "In macro, it's certainly coming from our equities client base in prime brokerage and in derivatives."
At Citi, revenues from the bank's markets business were up 17%, helping it generate more than $7 billion. Citi's equities business raked in gains of about 45%, with prime balances up nearly 60%, buoyed by increased demand from new and existing customers, and higher market valuations.
(Reporting by Anirban Sen in New YorkEditing by Nick Zieminski)
