Investment Banking and Capital Markets Market Report Third Quarter 2008

Transcription

1 Investment Banking and Capital Markets Market Report Third Quarter 28

2 Contents Overview of third quarter 28 results 2 Market review Fixed income and equity trading 8 Underwriting and M&A advisory 12 Focus: Managing through the downturn 18 BCG investment banking contacts 23 1

3 The third quarter of 28 marked the end of an era in investment banking Faced with a crisis of capital, liquidity, and confidence, the last of the independent investment banks disappeared in the third quarter The five major independent investment banks either collapsed or were bought or transformed Lehman Brothers, suffering mounting losses and a liquidity crisis, filed for bankruptcy; Goldman Sachs and Morgan Stanley found cover by becoming the bank holding companies; and Merrill Lynch sought a safe harbor through a merger with Bank of America The crisis demands a rapid response by banks What began as a subprime crisis has snowballed into a broad financial crisis that is now driving a downturn in the real economy, which is likely to be prolonged and profound Banks must act quickly by aggressively managing costs, undertaking a rigorous business portfolio review, scrutinizing their risk management infrastructure, and examining their target operating model and their organizational structure The crisis is transforming the landscape not only by eliminating or consolidating players, but also by changing the way banks will operate in the longer term Successful business models will have a clear focus on either client-centric transaction execution or active risk-taking and management, potentially complemented by advisory services Client-centric transaction players' activities will center around largely automated execution of client orders with risktaking limited to client facilitation Players which follow this model will need a high degree of efficiency and scale in post-trade processes Active risk takers will use top talent and superior risk management capabilities to take positions to exploit market inefficiencies, related or not related to client flow business 2

4 Investment banks fell deeper in the red during the third quarter Market conditions deteriorated rapidly during the third quarter The aggregate net revenues of the 12 banks included in the BCG Investment Banking Performance Index fell to $1.9 billion a 9% drop from Q2 and a far cry from $27.1 billion a year earlier Only two of the 12 banks, Morgan Stanley and BNP Paribas, experienced a pick-up in revenues in Q3 Aggregate revenues declined across all businesses except M&A, where revenues were flat Another round of write-downs in fixed income pulled net revenue into the red at five banks Gross operating expenses declined only 15% As a result, the BCG Investment Banking Performance Index fell from -15 to -164 (Q1 26 = 1) Three-fourths of the banks suffered negative gross operating profits Only JPMorgan, Morgan Stanley, and BNP Paribas remained in the black Performance varied widely across major investment banking activities Fixed income and equity trading Fixed income and equity sales and trading revenues went negative again (-$8. billion) after a recovery in Q2 ($7. billion) Fixed income revenues dropped to -$17.5 billion, due to further write-downs Equity trading activities fared better, generating revenues of $1.1 billion, down 34% from Q2 in part due to a decrease in trading volume and consequently commissions Underwriting (ECM and DCM) and M&A advisory Underwriting and M&A advisory revenues fell to $7.9 billion, down from $9.6 billion in Q2 Although M&A activity increased, revenues were flat As confidence left the market, underwriting activity and thereby revenues fell precipitously, particularly for bonds Note: The survey was expanded from nine investment banks (Q2 report) to include Bank of America, Société Générale, and BNP Paribas. Revenues by activity exclude BNP Paribas, for which disaggregated data are not available. Source: BCG analysis 3

5 After two quarters of reduced losses, industry performance deteriorated during the third quarter BCG Investment Banking Performance Index Index Original Performance Index (Q1/1 = 1; includes 9 banks listed in footnote) Updated Performance Index (Q1/6 = 1; adds Bank of America, BNP Paribas, and Société Générale) Q4/5 Q2/6 Q4/6 Q2/7-11 Q4/7 Q2/ Note: The index tracks gross operating profit. The original index includes Bear Stearns (through Q1 28), Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman (through Q3 28), Merrill Lynch, and Morgan Stanley. The updated index adds Bank of America, BNP Paribas, and Société Générale. For Q3 28, the financials of acquired firms and operations were not yet consolidated into the acquirer's financials. Source: Company reports; BCG analysis 4

6 Investment banks battled to lower expenses as revenues continued to deteriorate Net revenues ($B) 1 Net revenues and gross operating expenses of 12 investment banks, Q2 and Q3 28 = Q2 28 = Q3 28 Break-even 5 JPMC MS GS BNPP Negative revenues SG BoA UBS CS DB Citi LEH -5 ML Source: Company reports; BCG analysis Gross oper. exp. ($B) 5

7 Third quarter revenues were weighed down by trading write-downs Q3 7 Aggregated Net Revenues 1 ($B) ($B) Net revenues of 12 investment banks: Q3 28 vs Q3 27 Underwriting & M&A advisory revenues Trading revenues Q3 7 Q Q7 Total Q8 Total -1 MMS JPMCJ GS BNPP B DB SGS BoAB CSC Citi UBSU MLM 2 LEH L S S B G o S ti B L E A S H P M C N P P* 1. Excludes BNPP for which disaggregated data not available. Net revenues including BNPP totaled $1.9 billion. 2. Excludes net gain from Bloomberg sale ($4.3 billion) in Q3 28. Source: Company reports; BCG analysis 6

8 Contents Overview of third quarter 28 results 2 Market review Fixed income and equity trading 8 Underwriting and M&A advisory 12 Focus: Managing through the downturn 18 BCG investment banking contacts 23 7

9 Write-downs in fixed income trading erased gains elsewhere during the third quarter Fixed income trading fell further into the red during the third quarter Net revenues from fixed income markets were -$17.5 billion in the third quarter compared to -$8.9 billion in the second quarter Credit products continued to drag down performance whereas interest rate products, foreign exchange, and commodities generated positive results at several banks Seven of the banks in the BCG index suffered write-downs that eclipsed revenues Average weekly US bond-trading volumes continued to fall but the rate of decline slowed (-2% from Q2 to Q3 compared to -17% from Q1 to Q2) Declines were recorded in corporate bonds (-12%) and treasuries (-1%) Equity trading slid further in the face of heightened volatility Revenues from equity trading were $1.1 billion, down 34% from Q2 and 26% from the same period last year Trading volumes declined 3% in the quarter and were 13% lower than the same period last year Note: Revenue figures are for 11 investment banks; figures exclude BNPP, for which disaggregates were not available. Source: BCG analysis 8

10 Fixed income trading Fixed income revenues slid further into the red U.S. weekly average bond-trading volumes Fixed income trading revenues ($B) 1,5 1, 1,17 1,7 1,37 1,65 1,148 1,179 1,277 1,226 1,411 1,173-2% 1,153 ($B) Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Q28 Q38 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Q28 Q38 Corp Bonds MBS/ABS Treasury/Agencies Note: Trading volumes single counted, includes investment funds traded at exchanges; aggregated revenues for 11 investment banks surveyed (excludes BNPP, for which data were not available). Source: Federal Reserve Bank of New York; BCG analysis 9

11 Equity trading Equity trading revenues continued to slide Global-exchange trading volumes Equity trading revenues ($T) 3-3% ($B) % Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Q28 Q38 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 Q28 Q38 EMEA Asia Americas Note: Trading volumes single counted, includes investment funds traded at exchanges; aggregated revenues for 11 investment banks surveyed (excludes BNPP, for which data were not available). Source: World Federation of Exchanges; BCG analysis 1

12 Contents Overview of third quarter 28 results 2 Market review Fixed income and equity trading 8 Underwriting and M&A advisory 12 Focus: Managing through the downturn 18 BCG investment banking contacts 23 11

13 As confidence and liquidity left the capital markets, so did the demand for new issues M&A Advisory M&A activity increased 16% over the previous quarter, from $551 billion to $641 billion, while the number of deals fell 2% Deal value grew strongest in the Americas (27%) M&A advisory revenues, however, were flat compared to the previous quarter and were down one-third compared to the same period last year Goldman Sachs and JPMorgan continued to take the highest share of global M&A advisory revenues Underwriting After a brief recovery in the second quarter, revenues from underwriting activities slid during the third quarter, with DCM and ECM revenues falling 52% and 37%, respectively Due to steep declines in originations in both markets Morgan Stanley bucked the trend by growing both DCM and ECM revenues, while Goldman Sachs was able to grow its DCM revenue Equity origination fell by 35%, with sharp declines in EMEA and Asia Pacific Debt origination declined 49%, with precipitous drops in the Americas and EMEA Note: Revenue figures are for ten investment banks; excludes BNPP and Société Générale, for which disaggregates were not available. Source: BCG analysis 12

14 After a brief recovery, revenues from underwriting and M&A advisory activities fell ($B) 15 Global underwriting and M&A advisory revenues % ECM DCM M&A -5 Q35 Q45 Q16 Q26 Q36 Q46 Q17 Q27 Q37 Q47 Q18 1 Q28 Q38 1. DCM revenues were negative at two of the ten investment banks due to write-downs of highly leveraged finance commitments. Note: Revenue figures are for ten investment banks; excludes BNPP and Société Générale for which disaggregates not available. Source: BCG analysis 13

15 M&A activity strengthened in the third quarter while underwriting levels fell precipitously Effective M&A deals Equity issuance Bond issuance -49% ($B) 1,5 ($B) 3 ($B) 1,5 1, , , % % , 5 1, ,81 1, Q37 Q47 Q18 Q28 Q38 Q37 Q47 Q18 Q28 Q38 Q37 Q47 Q18 Q28 Q38 Asia-Pacific Americas EMEA Source: Thomson SDC; BCG analysis 14

16 Banks gained on the M&A leader, Goldman Sachs, but lost share to the underwriting leader, JPMorgan Relative share of M&A revenues Relative share of underwriting revenues 1 Relative Market Position 3Q8 Relative Market Position 3Q8 1 Gained share relative to #1 JPMC GS 1 JPMC UBS CS ML LEH Citi DB MS 6 4 BoA ML GS MS UBS LEH 2 2 CSFB BoA Lost share relative to # Relative Market Position 3Q7 Relative Market Position 3Q7 1. Citigroup and Deutsche Bank recorded write-downs leading to negative net revenues in 3Q8; DB in 3Q7. Note: Market position expressed relative to market leader. Source: Thomson SDC; BCG analysis 15

17 The crisis has created a new order in the underwriting league tables Share of global DCM, 26 and Q3 28 YTD Share of global ECM, 26 and Q3 28 YTD % Market Share Moved from 11 th to 1 st 1 Moved from 7 th to 2 nd 26 Q3 28 YTD % Market Share 14 Move from 6 th to 1 st Moved from 12 th to 2 nd Q3 28 YTD BoA- ML Bar Cap- Leh JPMC -BSC DB Citi RBS CS UBS MS GS Note: Market share based on share of proceeds. BarCap = Barclays Capital + Lehman's core North American investment banking and capital markets businesses; WF+Wach. = Wells Fargo + Wachovia. There was less shake-up in the M&A advisory field with Bank of America + Merrill Lynch moving up from 14 th to 4 th. Source: Thomson SDC; BCG analysis JPMC -BSC BoA- ML Citi GS MS UBS Bar Cap- Leh DB CS WF- Wach. 16

18 Contents Overview of third quarter 28 results 2 Market review Fixed income and equity trading 8 Underwriting and M&A advisory 12 Focus: Managing through the downturn 18 BCG investment banking contacts 23 17

19 Collateral damage: The credit crisis is driving a downturn in the real economy What began as a credit crisis is driving a downturn in the real economy 5 Further reduction in asset values 1 Credit crisis in US real estate 2 Leverage crisis in the securitization market Corporate credit crunch and cash flow/ liquidity crisis 4 Lower demand 1 Lower investment And no capacity for consumers to borrow more (absent inflation) 2 Lower output 4 Solvency crisis 3 Global liquidity crisis 3 Corporate defaults and job losses Source: BCG analysis 18

20 The result is a recession exacerbated by a credit crunch, equity crash, and real estate bubble Number of occurrences Financial stress worsens the effect of downturn Credit/ banking crunches 1 Only 5 th occurrence of simultaneous credit crunch, housing price crash, and equity market crash Cumulative output loss median (in % of GDP) Banking-related stress is typically 2 3 as deep and 2 4 as long 1.9 Housing price crashes Equity market crashes Preceded by financial stress -1.6 Not preceded by financial stress -4.4 Preceded by financial stress -2.3 Not preceded by financial stress Slowdowns Recessions Source: BCG analysis; IMF 19

21 Acting fast can create significant value Example of two different companies based on research from prior recession Expenses Limited, tentative responses Overreacts Company A Limited, tentative responses Overreacts late in the game Expensive recovery Expensive recovery Company B Acts fast Measured response Fast, measured response Label 1 1/8 Crisis Label 3 Label 3 Label 3 Label 3 Label 3 Label 3 Time Weak crisis management results in overshooting: Too late! Too much! Too random! Source: BCG analysis 2

22 Five key levers in a rapid response to the crisis 1 Aggressively manage cost Short term cost focus discretionary spending Structural changes to cost coverage, research, technology platforms, etc. 2 Secure revenues Protect core customers / franchises Adapt product portfolio to changing customer needs 3 Review business portfolio Portfolio choices growth, profitability, capital requirements, risk Acquisition opportunities to build scale / capabilities Divestitures to enhance focus, free up capital 4 Redefine target operating model Across key lines of business organize by client segments, products, regions Across key functions centralized vs. decentralized, in-house vs. outsourced 5 Redesign organization ('Delayering') Redesign spans and layers for efficiency and effectiveness Place right talent in redesigned roles Source: BCG analysis BCG has developed a set of tools to help clients address each of these levers 21

23 Contents Overview of third quarter 28 results 2 Market review Fixed income and equity trading 8 Underwriting and M&A advisory 12 Focus: Managing through the downturn 18 BCG investment banking contacts 23 22

24 BCG investment banking contacts Achim Schwetlick Partner and Managing Director New York Robert Grübner Partner and Managing Director Frankfurt Chandy Chandrashekhar Partner and Managing Director New York schwetlick.achim@bcg.com gruebner.robert@bcg.com chandrashekhar.chandy@bcg.com Ranu Dayal Senior Partner and Managing Director Singapore Shubh Saumya Partner and Managing Director New York Tjun Tang Partner and Managing Director Hong Kong dayal.ranu@bcg.com saumya.shubh@bcg.com tang.tjun@bcg.com 23