Bank of America followed its peers on Tuesday in reporting a big drop in equities-trading revenues, which were down 22%.
That’s in line with Citigroup and Goldman Sachs, both of which fell 24% in stock trading, but worse than JPMorgan Chase, which was down only 13%.
But Bank of America’s quarter would have looked a lot more like JPMorgan’s if it weren’t for a monster trade last year that boosted that quarter’s performance and gave them a harder baseline to improve upon this quarter.
The bank pulled in $1.2 billion in equities this quarter, versus $1.5 billion last year.
On a call with analysts, Paul Donofrio, Bank of America’s chief financial officer, said the bank’s equities unit would be down only 12%, instead of 22%, if you stripped out a large client’s derivative transaction from the first quarter of 2018.
That means the bank pulled in about $160 million on a single derivative deal in the first quarter last year.
When an analyst asked for more color on the trade, Donofrio demurred, saying they don’t like to give out details on particular clients or mention their names.
But insiders suggest the trade in question was most likely the complex derivative deal revealed in February 2018 that helped a Chinese billionaire snag a $9 billion stake in the German automaker Daimler.
The “collar trade” was structured so that Geely Group, which is owned by the Chinese billionaire Li Shufu, could quietly build up a 10% stake in the car company while also limiting downside risk, Bloomberg reported at the time.
The transaction caught both German regulators and financial markets by surprise because Geely stealthily built up the stake using derivatives options over the course of a year before suddenly pouncing and revealing its holding.
Reuters reported at the time that the deal worked like this:
“By using Hong Kong shell companies, derivatives, bank financing and carefully structured share options, Li Shufu kept the plan under wraps until he could, at a stroke, become Daimler’s single largest shareholder …
“… The banks then acquired additional shares in two ways without Geely having an entitlement to the shares and therefore no requirement to disclose the holding, according to two people familiar with the matter.
“Some were purchased directly, and the risk was offset by an ‘equity collar’ structure to protect the investment from losses.”
Why go to all the trouble? By orchestrating it this way, Geely could avoid disclosure rules that require companies to notify regulators when they exceed a 3% and 5% stake in a public firm. Thus, they could build a massive stake in the company without attracting attention, and without disrupting markets and affecting the price until they were already in.
The clever trade was the largest of its kind in a single stock, according to Bloomberg, and it breached no rules. And Bank of America and Morgan Stanley helped the company pull it off.
It’s not clear exactly how much each bank would’ve earned from facilitating the transaction. A Bank of America spokesman declined to comment for this story.
But Donofrio’s commentary suggests at least a roughly $160 million windfall to the equities unit’s income statement. The total haul for Bank of America could’ve been even higher because proceeds could’ve been spread out over multiple quarters, and executing the slow-burn derivatives trade likely would’ve required financing as well.
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