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U.S. banks report significant profits from prime brokerage

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Surging valuations and growing number of hedge funds boost

prime

brokerage business

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Some banks warn of unsustainably high asset prices, amid

prime

financing boom

By Anirban Sen

NEW YORK, Oct 15 (Reuters) - 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 ), Goldman Sachs ( GS ), and Bank of

America ( BAC ) 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.

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.

For the quarter ended September 30, JPMorgan's ( JPM ) equity

markets unit reported a 33% surge in revenue to $3.3 billion,

with strength across products, particularly in prime lending.

Morgan Stanley's ( MS ) equities revenue surged 35% to $4.12

billion, driven by record results in prime brokerage, while

fixed income revenue rose 8%.

"Prime brokerage revenues drove results as average client

balances and financing revenues reached new records," Morgan

Stanley ( MS ) 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.

On Tuesday, Goldman Sachs ( GS ) posted a 7% rise in revenue from

its equities business to $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.