Reuters/Aly Song
Bank of America's stock-trading business looked worse this quarter in part due to a monster trade it did for Chinese billionaire last year.
- Bank of America's equities division saw first-quarter revenues fall 22% compared with last year.
- That's due in part to a monster trade the bank did in 2018 that boosted the unit's baseline.
- Insiders said the trade in question was likely a complex derivative deal that helped a Chinese billionaire snag a $9 billion stake in German automaker Daimler.
- The so-called "collar trade" brought in roughly $160 million in the first quarter of 2018, based on the figures quoted by bank executives Tuesday, but the total could've been much higher.
Bank of America followed its peers on Tuesday in reporting a big drop in equities trading revenues, 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 only down 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, CFO Paul Donofrio pointed out that their equities unit would only be down 12% instead of 22% if you stripped out a large client derivative transaction from the first quarter of 2018.
That means the bank pulled in roughly $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 questions was most likely the complex derivative deal revealed in February 2018 that helped a Chinese billionaire snag a $9 billion stake in German automaker Daimler.
The so-called "collar trade" was structured so that Geely Group, owned by 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, with the help of Bank of America and Morgan Stanley.
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 the 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 them 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 roughly $160 million windfall to the equities unit's income statement. The total haul for Bank of America could've been even higher, since 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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