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Analyzing Bank of America and Wells Fargo’s Trading Revenue

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Trading revenue exposure

Wells Fargo (WFC) relies less on investment banking and trading revenue than its peers JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC). While JPMorgan, Citigroup, and Bank of America derive 15%–20% of their non-interest income from trading activities, it accounts for less than 1% of Wells Fargo’s income. In comparison, Bank of America’s earnings are exposed to trade-related activity. In 1Q16, trading revenue accounted for ~18% of Bank of America’s total income. Bank of America reported a 1.4% yearly drop in trading revenue in the first quarter. As such, Wells Fargo’s earnings are more resilient to capital markets. Under current macroeconomic conditions, analysts expect Wells Fargo to outperform Bank of America.

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Generally, the first fiscal quarter of the year is expected to be the strongest for banks’ trading divisions. In the first quarter of the year, traders open new positions and set out their strategies for the rest of the year. However, 1Q16 wasn’t kind to client activity and trading. Financial markets were extremely volatile during the quarter. Volatile markets kept clients away from issuing debt and equity, launching initial public offerings, and making acquisitions.

Investors looking for exposure to the banking space could invest in the Financial Select Sector SPDR ETF (XLF) or the iShares US Financials ETF (IYF) (IYG). Wells Fargo and Bank of America are well represented in these ETF portfolios.

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