Investment Banking and Capital Markets Market Report First Quarter May 28, 2008

Transcription

1 Investment Banking and Capital Markets Market Report First Quarter 2008 May 28, 2008

2 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 1

3 Investment banks faced difficult conditions but managed to improve performance during the first quarter Investment banks had a difficult start to the year but showed signs of improvement The aggregate revenues of ten leading investment banks remained negative, at -$3.9 billion, driven by additional write-offs, but they were well above fourth-quarter revenues of -$19.6 billion As a result, the BCG performance index improved from to in the first quarter Difficult market conditions prevailed in the first quarter The period was defined by the collapse of Bear Stearns and its subsequent takeover by JPMorgan Chase Markets were affected by the global liquidity crisis and further repricing of credit risk The structured-credit market was dampened by depressed client activity in CDOs and related products The disruption in credit and fixed-income markets reverberated across virtually every asset class regardless of fundamentals or underlying quality Activity in high-margin institutional businesses, such as advisory and underwriting, slowed Revenues were heavily affected by the downturn Fixed-income and equity trading Sales and trading revenues of ten leading investment banks totaled -$5.1 billion, well above fourth-quarter revenues of -$32.0 billion Fixed-income revenues were again adversely affected by write-downs. Revenue from equity-trading activities was similar to the previous quarter but 16.0 percent lower than the same period last year Corporate finance and advisory Corporate finance and advisory revenues fell by 74.9 percent over the previous quarter and were 74.4 percent lower than the same quarter last year. M&A advisory and equity and debt underwriting activities all experienced declining revenue Source: BCG analysis 2

4 Industry performance improved in the first quarter Index (Q1/01= 100) BCG Investment Banking Performance Index Q2/05 Q4/05 Q2/06 Q4/06 Q2/07 Q4/ Note: The BCG Investment Banking Performance Index is calculated based on aggregate profits of ten leading banks Source: Company reports; BCG analysis 3

5 Revenues improved but were more than 100 percent lower than the same quarter last year Pre-tax profit margins and revenues: Q versus Q Pre-tax profit margin (%) 60% Pre-tax profit margins and revenues: Q versus Q Pre-tax profit margin (%) 60% 50% 50% 40% 40% 30% 20% 10% BSC LEH JPM GS MS 30% 20% 10% BSC LEH JPM GS MS 0% Revenues ($B) Change in revenues including write-offs: n/m 1 Change in revenues excluding write-offs: +18 percent Q1/08 Q4/07 0% Revenues ($B) Change in revenues including write-offs: -107% Change in revenues excluding write-offs: -23% Q1/08 Q1/07 Note: Ø calculated on a revenue-weighted basis; revenue includes investment banking, institutional sales and trading, and principal investments. Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, and UBS were omitted from charts but were included in the calculations Source: Company reports; BCG analysis 4

6 Write-downs took a heavy toll on trading revenues Revenues by company: Q vs Q Total revenues ($B) 12 9 ($B) MS GS JPM LEH BSC DB CS MER Citi UBS Corporate finance & advisory revenues Note: Not including principal investments and other revenues Source: Company reports; BCG analysis Trading revenues 1Q07 Total 1Q08 Total incl Writeoffs 1Q08 Total excl Writeoffs 5

7 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 6

8 Equity trading fared better than fixed-income trading Fixed-income trading Revenues from fixed-income markets were 172 percent lower than the same quarter last year, as write-downs continued to mount Fixed-income revenue of ten leading investment banks was hit by write-downs totaling about $50 billion UBS, Credit Suisse, Citigroup, and Merrill Lynch recorded negative revenue Revenues from FX, interest rates, and commodities increased, partially offsetting the declines in credit products US bond-trading volumes were 15.1 percent higher than the previous quarter Equity trading Revenues from equity trading were marginally lower in the first quarter and were 16.0 percent lower than they were during the same period last year, when they peaked at $18.7 billion Trading volumes remained stable during the quarter Source: BCG analysis 7

9 Fixed-income trading Subprime write-downs continued to weigh on fixed-income revenues U.S. weekly average bond-trading volumes Fixed-income trading revenues by quarter ($B) 1,500 1,000 1,179 1,072 1,092 1,107 1,148 1,053 1,063 1,070 1,037 1,065 1,277 1, % 1,411 ($B) Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Corp Bonds MBS/ABS Treasury/Agencies Note: Trading volumes single counted, includes investment funds traded at exchanges; aggregated trading revenues for ten leading investment banks surveyed Source: Federal Reserve Bank of New York; BCG analysis 8

10 Equity trading Equity-trading revenues declined marginally Global-exchange trading volumes Equity-trading revenues by quarter ($T) ($B) % Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 EMEA Asia Americas Note: Trading volumes single counted, includes investment funds traded at exchanges; aggregated trading revenues for ten leading investment banks surveyed Source: World Federation of Exchanges; BCG analysis 9

11 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 10

12 The financial crisis continued to affect advisory and origination activity Advisory M&A activity declined 38.9 percent over the previous quarter and was 18.2 percent lower than the same period last year In the Americas, advisory activity was 56.1 percent lower than the previous quarter; activity in Asia-Pacific was 40.3 percent lower Goldman Sachs continued to take the highest share of global advisory revenues Corporate Finance Equity origination was 59.3 percent lower than the previous quarter Underwriting declined in all three regions, with activity in EMEA and Asia-Pacific dropping by 79.7 percent and 61.8 percent respectively. In the Americas, equity underwriting was 29.5 percent lower than the previous quarter IPO activity weakened Debt origination dropped slightly during the quarter, reflecting the continual decline in leveraged finance and mortgage-related activity since the third quarter of 2007 Bond issuance was 1.9 percent lower than the previous quarter and 47.3 percent lower than the same period last year Source: BCG analysis 11

13 Revenues from corporate finance and advisory activities dropped by 74 percent ($B) 15 Global corporate finance and advisory revenues % ECM M&A 0 DCM -5 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Note: Aggregated revenues for ten leading investment banks surveyed Source: BCG analysis 12

14 Advisory and underwriting levels weakened in the first quarter Effective M&A deals Equity issuance Bond issuance ($B) 1,500 ($B) 300 ($B) 2,500 1, % % 2,000 2, , , ,500 1, ,086 1, , , % 1, Q107 Q207 Q307 Q407 Q108 Q107 Q207 Q307 Q407 Q108 Q107 Q207 Q307 Q407 Q108 Asia-Pacific Americas EMEA Source: Thomson SDC; BCG analysis 13

15 Goldman Sachs remained the market leader in M&A while JPMorgan Chase continued to lead underwriting Share of global M&A revenues Share of global underwriting revenues Relative market position Q1/08 (%) 100 Gained share GS Relative market position Q1/08 (%) 100 Gained share JPM 80 MS JPM 80 LEH MS GS 60 LEH MER CS Citi 60 UBS MER CS DB UBS 20 BSC Lost share Relative market position Q1/07 (%) 20 BSC Lost share Relative market position Q1/07 (%) Note: Market position expressed relative to market leader; aggregated revenues for ten leading investment banks surveyed. Citigroup and Deutsche Bank were omitted from underwriting chart. Source: Thomson SDC; BCG analysis 14

16 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 15

17 Several trends are driving strong growth in Asia-Pacific Rapid economic growth (domestic and cross-border trends) Fast-developing capital markets Fastest growing region in the world over a sustained period (fee pool in Asia-Pacific ex- Japan is expected to grow at an average annual rate of 11-16% from 2006 to 2012) Asia-Pacific economies are becoming increasingly international, offering significant cross-border opportunities (trade and investment) Capital markets still largely underdeveloped in Asia-Pacific; bank loans still the primary corporate financing source (e.g., China ~80%); significant potential for long-term growth Rapid growth already started; Asia-Pacific home to 8 of top 20 stock markets globally Fast accumulation of private wealth Very sizable and fast-growing private wealth in the region due to rapid GDP growth Shifting of wealth from bank deposits to investment assets Overall wealth industry growth at ~20-25% per annum, with development of both onshore and offshore private wealth markets Demand from institutional assets (including SWFs) Large pool of sovereign wealth funds (SWF), insurance and banking assets seeking higher yield Significant flow of investment funds into the region Deregulation trends Deregulation is opening more opportunities to foreign institutions, e.g., onshore capitalmarket opportunities in China, outbound investments of banks and insurance companies in Asia-Pacific Source: BCG analysis 16

18 Asia-Pacific presents five major growth opportunities for investment banks Asset liability management (ALM) and yield enhancement Growing demand for risk management solutions, such as ALM, and yield enhancement solutions due to profitability pressure, regulatory changes, and increasingly complex financial needs Sovereign wealth funds, central banks, and pension funds Central banks and SWFs in the region have different levels of sophistication and varying investment appetites; serving them will require both strong local relationships and global network capabilities China s capital markets China s equity market more than tripled from , and last year boasted IPOs valued at 77 billion. Major players are building a strong local presence and forming JVs to tap large and rapidly growing onshore opportunities Retail structured products / equity derivatives Asia-Pacific household wealth exceeded 17 trillion in The region s largest markets for retail structured products were Japan, Hong Kong, and Taiwan. Many players are actively targeting private and retail clients. Structured-product opportunities, whilst led by equities-based products, span a range of asset classes Structured finance acquisition financing Strong inflow of new buyout funds into Asia-Pacific, with largest opportunities in Australia and Japan; market tends to be more lumpy, especially due to US-led credit crunch. Significant continued growth in demand for infrastructure financing as Asian economies develop Source: BCG analysis 17

19 To develop a strategic growth plan for Asia-Pacific, players must address a range of issues Strategic priorities Partnering Capabilities Structure/ governance Ops/IT platform For market attackers Which geographies and products are most attractive/suitable? How much/ fast to invest (pioneer vs. fast follower)? Build joint ventures or alliances vs. major acquisitions vs. organic business expansion? How do local regulations affect existing business models? How can local knowledge and client relationships be built? Regional vs. global product lead? Role of the headquarter? How should the local platform be integrated with global off-shoring/ outsourcing strategy? For market incumbents What share of the business portfolio should/could capital markets be? Playing offense vs. defense by product area? Alliances with other local players? Pan-Asian joint ventures/ alliances? Partnerships with regional players in the US/ Europe? Can state-of-the-art capabilities in technology and risk management be acquired or built? In foreign partnerships, how can differences in culture and compensation be managed? How can a scalable target operating model be built despite legacy systems? Source: BCG analysis BCG has advised major attackers and incumbents on their growth strategies for Asia-Pacific and other emerging markets 18

20 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 19

21 BCG project example: Capital markets portfolio alignment Context BCG helped a capital-markets player in North America to review its strategic priorities and adjust its business portfolio to current market conditions Focused on separating the effects of short-term market dislocations from longerterm structural trends and growth opportunities The effort involved joint client and BCG work streams and project teams In-depth business portfolio review across sales & trading and banking On sub-product level for a number of prioritized business units Approach Assessment of businesses based on internal and external criteria including Financial performance, capital efficiency, risk, client portfolio, current capabilities and gaps, market trends and projections (short term vs. mid/long term) Formulation of overall business vision and strategy Portfolio alignment based on business assessment and strategic fit Identified business areas for future growth, refocusing, and exit 20

22 Select learnings from recent engagements in aligning capital markets portfolios Key findings Results Many capital-markets businesses have been only mildly affected by the credit crunch E.g., equity derivatives, FX, prime brokerage For some businesses that have been more directly affected, long-term fundamentals are still intact E.g., securitization, credit derivatives Portfolio adjustments should focus on balance-sheet exposure while maintaining or strengthening the talent base Other businesses, especially in fixed income, have become over-reliant on balance-sheet and short-term funding These economics are not sustainable in the current capital and liquidity environment Buoyant market conditions made it easy to replace shrinking client margins with proprietary trading, which is not always linked to specific capabilities To focus on client-driven business models, players will need to concentrate risktaking on client facilitations, rather than universally reducing risk Continuous progress of technology and electronification requires significant investment and capability build-outs Even in areas of strong current performance and position A commonly agreedupon portfolio alignment strategy as a platform for future growth Clarity on target clients Focus of future investments Significant reduction in capital and higher netincome growth driving an uplift in ROE Many businesses still operate with product-silos Not fully capturing share-of-wallet opportunities with clients and efficiency opportunities in the middle and back office 21

23 Strategic questions going forward What are the long-term implications of reduced risk appetite, capital, and leverage? Size and growth of ongoing revenue and profitability Capital markets revenue models (e.g., reduced carry income, enhanced focus on agency fees) Operations and IT capacity/productivity alignment with front-office strategy What counter-cyclical opportunities have been created due to the present dislocation? Inexpensive franchises, talent, and assets Materially reduced competition in several capital-markets businesses Ability to use capital and technology to strategically drive market share gains What capital-markets businesses will emerge as the industry s growth engines? Intermediation in emerging markets? Private liquidity pools? Re-distribution of impaired tranches of securitized assets? Strategic mergers and acquisitions by non-sponsor buyers? Other? 22

24 Contents Overview of first quarter 2008 results 1 Market review Fixed-income and equity trading 6 Corporate finance and advisory 10 Focus: Asia-Pacific 15 BCG project example 19 BCG investment banking contacts 23 23

25 BCG investment banking contacts Achim Schwetlick Partner and Managing Director New York Ranu Dayal Partner and Managing Director Singapore Robert Grübner Partner and Managing Director Hamburg Shubh Saumya Partner and Managing Director New York For questions regarding methodology and analyses, please contact: Anthony Cheong Josh Ellstein New York New York