Investment Banking and Capital Markets - BCG · Investment Banking and Capital Markets ... Credit...
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Investment Banking and Capital Markets Market Report — Fourth Quarter 2009
Transcript of Investment Banking and Capital Markets - BCG · Investment Banking and Capital Markets ... Credit...
Investment Banking and Capital Markets Market Report — Fourth Quarter 2009
1
Contents
Review of 2009 and outlook 2
Overview of fourth quarter 2009 results 9
Market review 15• Fixed income and equity trading• Underwriting and M&A advisory
2
Following a strong recovery last year, investment banking revenues are expected to fall in 2010
Source: BCG analysis.
After a devastating 2008, the investment banking industry staged a strong comeback in 2009• Net revenues (before write-downs) jumped nearly 50% to $311 billion, up from $213 billion in 2008
– They remained below the 2007 peak of $328 billion• The recovery was fueled by trading revenues, in particular fixed income
– Fixed income accounted for 45% of revenues while equity trading accounted for 21% and proprietary trading for 14%
– Extraordinary market conditions—characterized by above-average volatility and relatively low liquidity—generated exceptional spreads in fixed income
– The growth engines were client-driven business in credit and rates as well as proprietary trading• The surge in revenues, coupled with cost controls, resulted in a strong profit margin of 24% (by
comparison, the margin in 2006 was 22%)– Post-tax profits hit $75 billion, up $11 billion from 2006
The comeback will falter in 2010, however, as markets continue to normalize• There were already signs of stalling revenue growth in Q4 2009• Under a neutral market scenario, revenues will fall to $277 billion, down 11%• The revenue mix will shift notably as markets normalize
– Fixed income's share is expected to decline from 45% to 39%– Proprietary trading from 14% to 7%– Whereas equity trading's share will rise from 21% to 26%
• Underwriting and M&A are expected to continue their recovery, increasing their share of revenue from 20% to 28%
3
Under a neutral market scenario, revenues will fall 11% in 2010
277
311
213
328
289
218
189161
129142
0
100
200
300
400-11%
2001
($B)
2010200920052002 2003 20062004 2007 2008
Global net revenues (excluding write-downs)
Profitability(including write-downs)
1. Assumes no significant market disruptions. Source: Company reports; BCG analysis.
Post-taxprofits ($B)
Post-taxprofit margin
Neutral Scenario1
\\
Historical profit margin range
64
75
<0~0
22%24%
0
10
20
30
40
50
60
70
80
2006 2007 2008 20090%
5%
10%
15%
20%
25%
30%
Post-tax profitsProfit margin
4
Revenue mix will shift markedly with equities and underwriting/M&A gaining
21 28
2330
18
20
45 18
2220
28
22
59
40
22
19
18
19
21
23
27
31
277
2010 - Neutral
Equity derivatives
Equity cash
Prime BrokerageStructured creditCredit (incl. deriv.)
Rates (incl. deriv.)
Currencies
Commodities
Proprietary trading
DCM
ECM
M&A
7
311
2009
7
CAGR vs.2007 peak
2010: Neutral Scenario2010: Neutral Scenario20092009
14%
10%
8%-5%
-15%
-32%
-22%
-7%
-60%
10%
30%
35%
-2.6% -5.5%
Equities
Fixed Income
ProprietaryTrading
Underwriting and M&A
Underlying DriversUnderlying Drivers
• Recovery in less complex products
• Steady growth in trading volumes and performance indices
• Growth in trading volumes and increase in market concentration
• Continued weak demand, risk aversion• Continued tightening of spreads as volatility
declines, liquidity returns, and competition heats up; lower DCM
• Similar to credit; rise in corporate hedging needs counteracting factor
• Continued tightening of spreads as volatility and macro-economic uncertainty declines
• Recovery in client demand, lower risk aversion
• Market normalization sharply reduces opportunities; regulatory/capital pressure
• Continued rise in investor demand and confidence; low rate environment
• Economic recovery and rising performance indices; need to replenish capital
• Economic recovery, improving corporate earnings, and attendant rise in confidence
Source: BCG analysis.
-5%
5
The banks in BCG's performance index achieved above- average revenue growth
Source: BCG analysis.
Revenues of the 12 banks in BCG's Investment Banking Performance Index grew significantly• They generated $245 billion in net revenues (before write-downs), up 69% from 2008
– After write-downs, net revenues were $217 billion– As markets stabilized, write-downs fell sharply, amounting to $28 billion, or less than a fifth of 2008
write-downs – The top three banks accounted for 43% of revenues
• After five quarters of severe losses (Q4 2007 to Q4 2008), trading revenues rebounded vigorously from Q1 through Q3 2009
– Trading revenues (before write-downs) nearly doubled to $202 billion in 2009 – After write-downs, trading still earned an exceptional $174 billion, nearly $100 billion above 2007
• Underwriting and M&A advisory revenues grew 23% to $43 billion but remained 14% below the 2007 peak
At the same time, the 12 banks maintained cost discipline• Costs were 16% lower than the 2007 peak and 2% lower than in 2008, partially driven by a reduction in
compensation pay-out ratio
Quarter over quarter performance was uneven with a peak in Q2 • BCG's performance index rebounded to 86 in Q1 from -414 in Q4 2008 and continued to rise to 140 in Q2• The rebound stalled in Q3 at 139 and then reversed in Q4 with the index falling to 104
6
An exceptional trading environment fueled the recovery in 2009
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
G S
36,588
11,475
JP M
30,426
-23,930
Cit i
26,257
-3,147
Bo A*
23,110
6,247
Ba rC ap
21,227
346
D B
20,413
13,194
C S
19,134
2,977
M S
18,052
3,387
B N P P
12,519
5,465
S G
8,888
-2,300
No m ur a
6,765
-22,157
U B S
6,467
($B)
-420
Net revenues: 2008 and 2009(in descending order of 2009 net revenues)
Underwriting & M&A advisory revenues
Trading revenues incl.write-downs
35
43
35
43
174
-47
202
111
146
2008
245
2009
Trading incl.write-downs
Trading excl.write-downs
Underwriting & M&A
2009
217
2008
-12
Aggregated net revenues of 11 leading banks1
08 09
Note: Net revenues exclude credit valuation adjustments on banks' own credit. 1. Excludes BNPP for which disaggregated data were not available. 2. For Deutsche Bank and Citigroup, write-downs on leveraged finance were moved from DCM revenues to trading to be comparable with other banks in 2008. 3. Underwriting excludes fees on own transactions in Q4 2009. 4. Total of both. Note: Aggregated net revenues excludes "other" capital markets revenues reported by Deutsche Bank, Credit Suisse, and Citigroup.Source: Company reports; BCG analysis.
($B)
69%
Excluding netwrite-downs
Including net write-downs
GS JPM Citi2 BoA3 Bar DB2 CS MS BN SG No- UBS Cap PP4 mura
7
Expense control contributed to the bottom line
556
4
7
4
89
10
20
10
7
12
14
12
16
12
11
1514
17
13
21
15
0
2
4
6
8
10
12
14
16
18
20
22
S G
M S
G S
D B
J P M
* C S
Ci ti
B ar C a p
B o A
U B S
N o m ur a
B N P P
($B)
Gross operating expenses: 2008 and 2009(in descending order of 2009 net revenues)
136139
162
20092007
-16%
Aggregated gross operating expenses of 12 leading banks
($B)
GS DB JPM1 CS Citi MS Bar BoA2 UBS No- BNPP SGCap3 mura3
1. Includes Bear Stearns for full year 2008. 2. Includes Merrill Lynch for full year 2008. 3. 2008 excludes Lehman Bros.Source: Company reports; BCG analysis.
08 09
8
Contents
Review of 2009 and outlook 2
Overview of fourth quarter 2009 results 9
Market review 15• Fixed income and equity trading• Underwriting and M&A advisory
9
After three quarters of revenues north of $60 billion, revenues dropped dramatically in Q4• Net revenues totaled $44 billion in Q4 2009, down $18 billion from Q3 (-28%) but still robust compared
to the year prior when net write-downs pulled revenues down to -$36 billion– The fall was driven by a continued decline in volatility, an increase in liquidity, an attendant reduction
in bid-ask spreads, and a seasonal decline in trading volume (reported by the majority of banks)• Gross operating expenses declined 30%, largely driven by a sharp reduction in bonus pay-out ratios
relative to provisions at the majority of banks– Several firms saw a decline in compensation of over 50% during Q4– Expenses fell far less than revenues in absolute terms (-$10 billion), however
As a result, the BCG Investment Banking Performance Index fell from 139 to 104• Signaling that the strong recovery is not sustainable in normal market conditions
The decline in revenues was concentrated in sales & trading, in particular fixed income Fixed income and equity trading
• After barely missing the precrisis peak of $31.0 billion in Q3, fixed income revenues fell sharply to $15.7 billion1, a 49% decline
• Equity trading revenues also suffered, falling 29% to $9.1 billion1 despite an increase in trading volumesUnderwriting (ECM and DCM) and M&A advisory
• In contrast, underwriting and advisory revenues surged in Q4, up 27%, hitting $10.7 billion2
• M&A led the charge (74% increase), followed by ECM (27%), and DCM (6%) Note: All financials in this report exclude credit valuation adjustments on banks' own credit.1. Excludes Barclays Capital, BNPP, and Nomura, for which data were not available. 2. Excludes Barclays Capital, BNPP, Nomura, and Société Générale, for which data were not available. Source: BCG analysis
The industry's recovery slowed during the fourth quarter
10
Performance declined again during the 4th quarter
9369
103132 126
-96
139104
140
86
-414
-293
100
-14
-211-197
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
50
100
150
200
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409
Performance Index
BCG Investment Banking Performance Index
Index
Note: The index includes Bank of America, Barclays Capital (includes Lehman North America as of Q4 2008), Bear Stearns (through Q1 2008), BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman (through Q3 2008), Merrill Lynch (through Q4 2008), Morgan Stanley, Nomura (includes Lehman APAC and select EMEA operations as of Q4 2008), Société Générale, and UBS. The index tracks gross operating profit.The index excludes credit valuation adjustments on banks' own credit.Source: Company reports; BCG analysis.
(Q1/06 = 100)
2006 2007 2008 2009
11
The rise in underwriting and M&A revenues was eclipsed by the decline in trading revenues
2,000
-1,515
-3,904
3,050
-1,545
2,3211,113
2,267
-2,031
2,145
5,318
0
2,000
4,000
6,000
8,000
-2,000
-4,000
($B)
-3,041
7,356
308
5,598
765
-15,758
5,159
-4,675
Trading
3,814
-2,556
3,865
-4,870
3,539
Net revenues: Q4 2008 vs Q4 2009 (in descending order of net revenues for Q4 09)
GS2 JPM Bar Citi BoA3 MS2 DB CS No- SG UBS BN- Cap mura PP4
Aggregated net revenues1
Underwriting & M&A advisory revenuesTrading revenues including net write-downs
Q4 08 Q4 09
Note: Net revenues exclude credit valuation adjustments on banks' own credit. 1. Excludes BNPP for which disaggregated data are not available, and "other" capital markets revenues reported by Deutsche Bank, Credit Suisse, and Citigroup. 2. Q4 08 ended in November; Q4 09 ended in December. 3. Includes Merrill Lynch for both quarters; underwriting excludes fees on own transaction. 4. Total of both; disaggregated data were not available.Source: Company reports; BCG analysis.
($B)
-45
50 52
31
9
1210
13
9
12 10
13
32
5157
-2
7
69
61
45
-36
62 62
44
-28%
Q408
Excluding netwrite-downs
Including net write-downs
// //Q209 Q309 Q409 Q209 Q309 Q409
Underwritingand M&A
Trading
Q408
-26%
12
The reduction in operating expenses did not make up for the revenue shortfall
...most banks suffered deteriorating operating leverage
...most banks suffered deteriorating operating leverage
1. For GS and MS, Q4 08 ended in November. 2. For comparability, BoA includes ML in Q4 08. 3. Data not available to add Lehman to Q408.Source: Company reports; BCG analysis.
Despite reining in operating expenses...Despite reining in operating expenses...
DB Citi BarCap3
MS1 JPM BoA2 CS No-mura
3
UBS BNPP
7,000
Op.exp. ($M)
1,000
0
Q4 09 Q3 09Q4 08
SGGS1
3,000
4,000
2,000
(sorted in descending order Q4 09)
-40% -30% -20% -10% 0% 10% 20%
UBSDB
CS
JPM
Citi
MS
GS
BoA
BNPP
SG
Nomura
Net rev ∆
Q3-Q4 (%)
0%
20%
-20%
-40%
Op.exp. ∆
Q3-Q4 (%)
Costs upRevenues down
Costs downRevenues down
Costs upRevenues up
Costs downRevenues up
Negative operating leverage
-30% Q309-Q409
Positive operating leverage
13
Net revenues and profit margins declined at most banks
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
UBS
DB
CS
JPM
Citi
MS
GS
BoA
BNPP
SG
Nomura
10,000 12,0002,000 4,000 6,000 8,000
Net revenues
Pre-tax profit margin
LegendBoth margin and revenues declinedBoth margin and revenues improvedOne improved while other declined or remained the same
Q309Q409
Note: Net revenues exclude credit valuation adjustments on banks' own credit. Source: Company reports; BCG analysis.
Avg pre-tax profit margin Q4
14
Contents
Review of 2009 and outlook 2
Overview of fourth quarter 2009 results 9
Market review 15• Fixed income and equity trading• Underwriting and M&A advisory
15
As markets normalized, trading revenues fell precipitously
After an extraordinary rebound from Q1 through Q3, fixed income trading revenues plummeted in Q4• In Q4, net revenues from fixed income trading were nearly halved, falling to $15.7 billion1
• Revenues fell despite the slight growth in average weekly US bond-trading volumes• Credit continued to generate the strongest results while rates, foreign exchange, and commodities
recorded mixed results at individual banks• U.S. trading volumes increased 2% in Q4 compared to -2% in Q3
– A slump in corporates was counteracted by a rise in MBSs and governments
Equity trading revenues also suffered but not to the same degree• Net revenues fell 29% to $9.1 billion1 far below the pre-crisis peak ($20.4 billion in Q107)
– Several banks reported declining volumes (seasonal) and lower prime brokerage revenues– Overall global trading volumes were flat – Positive market conditions, including rising performance indices and lower volatility, prevented a
sharper decline • American markets were the exception in trading trends
– Trading volume grew 3%, after declining 8% in Q3– In contrast, Asian markets which had grown in Q3, experienced a reversal– European markets were flat
1. Revenue figures exclude credit valuation adjustments on banks' own credit. Revenues are for nine investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available for the entire time series.Source: BCG analysis.
16
After three strong quarters, fixed income trading revenues plummeted in Q4 as markets normalized
15.7
30.630.125.9
-51.5
-23.9
-10.3
-28.4
-54.6
1.8
28.031.0
23.3
-60
-40
-20
0
20
40
Q409Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309
-49%($B)
Fixed income trading
Note: Trading data are for average weekly primary dealer transactions. Trading revenues exclude credit valuation adjustments on banks' own credit.1. Revenue figures are for nine investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available for the entire time series.Source: Federal Reserve Bank of New York; company reports; BCG analysis.
U.S. weekly average bond-trading volumesU.S. weekly average bond-trading volumes Fixed income trading revenues1Fixed income trading revenues1
0
500
1,000
1,500
Q207
1,277
Q307
1,226
Q407
1,411
Q108
1,173
Q208
1,153
Q308
903
Q408 Q409
1,065
Q406
1,148
Q107
1,179
945
Q109
908
Q209
883
Q309
Corp Bonds
MBS
Treasury/Agencies
+2%
($B)
1,018
17
Equity trading revenues dropped as volatility declined and pressure on commissions returned
Equity trading
9.1
12.913.9
12.6
-4.1
6.1
15.616.817.4
13.6
19.820.4
14.0
-5
0
5
10
15
20
25
Q409Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309
-29%
($B)
Note: Trading volumes single counted; includes investment funds traded at exchanges. Trading revenues exclude credit valuation adjustments on banks' own credit.1. Revenue figures are for nine investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available for the entire time series.Source: World Federation of Exchanges; company reports; BCG analysis.
Global-exchange trading volumesGlobal-exchange trading volumes Equity trading revenues1Equity trading revenues1
0
5
10
15
20
25
30
20.2
Q409
18.2
Q406
22.1
Q107
25.0
Q207
27.0
Q307
26.3
Q407 Q108
24.3
Q208
23.6
Q308
23.5
Q408
18.6
Q109
21.1
Q209
20.3
Q309
EMEA
Asia
Americas
<-1%
($T)
26.2
18
Contents
Review of 2009 and outlook 2
Overview of fourth quarter 2009 results 9
Market review 15• Fixed income and equity trading• Underwriting and M&A advisory
19
After a disappointing Q3, underwriting and M&A revenues rebounded in Q4
Underwriting revenues increased 15% to $7.7 billion1
• But remained below the previous peak of $8.3 billion in Q2• ECM revenues grew 22% to $4.0 billion, bouncing back to the Q2 level
– Issuances jumped 37% from $163 billion to $223 billion– Fueled by an extremely active market in the Americas and to a lesser degree in Asia
• DCM revenues picked up 6% to $3.7 billion– Despite the decline in issuances of 7% (from $1,133 billion to $1,051 billion)– The big growth engine—investment-grade issuance—continued to slump, as did government and
ABS issuances• JPMorgan retained its #1 position, but competitors continued to gain market share
M&A activity surged as economic conditions improved and several mega-deals occurred• Deal value increased 41% during Q4 to $539 billion but remained far below the Q4 2007 peak
– The resurgence was driven by deals in the Americas, up 72%, and in Asia, up 42%– In contrast, European deals fell 11%
• As a result of the surge in deal flow, revenues jumped 74% to $3.1 billion1
– Goldman Sachs out-earned JPMorgan, after placing a close second in Q2 and Q3– The rest of the banks lost share to the new leader
1. Revenue figures are for eight investment banks; excludes Barclays Capital, BNPP, Nomura, and Société Générale, for which disaggregates were not available. Source: BCG analysis.
20
Combined underwriting and M&A revenues picked up significantly but remained below their peak
1. Revenue figures are for eight investment banks; excludes BNPP, Société Générale, Barclays Capital, and Nomura, for which disaggregates were not available.2. To be consistent with the majority of banks, for Citigroup and Deutsche Bank, write-downs and recoveries included in DCM were added back and deducted from fixed income trading.Source: BCG analysis.
0
5
10
15
Q305
9.3
Q405
9.5
Q106
10.5
Q206
9.5
Q306
12.6
Q406
12.5
Q107
14.4
Q207
11.6
Q307
12.7
Q407
7.5
Q108
10.6
Q208
8.1
Q308
6.8
Q408
10.8
Q409Q209
8.6
6.8
Q109
10.2
Q309
8.5
DCM 2
M&A
+27%
($B)
ECM
Global underwriting and M&A advisory revenues1
21
M&A and equity activity jumped whereas debt slumped
1. Deals that were either declared unconditional (i.e. all conditions set by the acquirer have been fulfilled) or completed during the quarter.Source: Thomson SDC; BCG analysis.
Effective M&A deals1Effective M&A deals1 Equity issuanceEquity issuance Bond issuanceBond issuance
94
5327 31 25
4931 27
66
73
59 54
19
54
72
29
14 21
19
47
78
92
0
100
200
300
Q207
155
Q208
100
Q308
106
Q408
63
Q109
106
Q209
163
Q309
104
223
Q409
Asia-Pacific
Americas
EMEA
+37%
($B)
202
232
101
125
0
500
1,000
1,500
2,000
2,500
1,449
Q208
309
331
741
Q308
97
262
219
578
Q408
152
634
703
1,489
Q109
195
640
672
1,507
Q209
190
459
484
1,133
Q309
195
466
390
134
Q409
-7%
($B)
1,220
1,051
771
2,125
Q407
690
634
9286
64
91
98
58
55
0
500
1,000
1,500
615
Q208
302
294
682
Q308
156
306
247
709
Q408
275
171
501
258
143
299
Q209
200
117
381
Q309
344
104
539
Q409
155
($B)
591
Q109
498
1,244
Q407
265
+41%
Peak Peak
Peak
22
Relative share of M&A revenuesRelative share of M&A revenues Relative share of underwriting revenuesRelative share of underwriting revenues
0
20
40
60
80
100
0 20 40 60 80 100
GS
JPM
MS
BoACS
UBSCiti
DB
Q408
Q409
0
20
40
60
80
100
0 20 40 60 80 100
JPMCiti BoA
GSMS
CS
UBS DB
Q408
Q409
1. For comparability, BoA includes ML and JPM includes Bear Stearns across quarters. Note: Market position expressed relative to market leader (leader = 100). Disaggregates were not available for Barclays Capital, BNPP, SocGen, and Nomura.Source: Company reports; BCG analysis.
Gained share relative to #1
Lost share relative to #1
Gained share relative to #1
Lost share relative to #1
In M&A, most banks lost share to the leader while in underwriting, the opposite occurred
#1 Q4 2009
#1 Q4 2008
(Q409 compared to Q408) (Q409 compared to Q408)
#1 Q4 2009 #1 Q4 2008
