INVESTMENT BANKING AND CAPITAL MARKETS - … BANKING AND CAPITAL MARKETS ... Q4 2004 Market...

INVESTMENT BANKING AND CAPITAL MARKETS

Market Report—Fourth Quarter 2004 Edition

New York, Frankfurt

March 10, 2005

THE BOSTON CONSULTING GROUP

TABLE OF CONTENTS

Chapter Page

Global Investment Banking Outlook

Investment Banking Results 4th Quarter 2004

Market Review

• Corporate Finance and Advisory

• Fixed-Income Trading

• Equity Trading

Data Definitions

2

10

16

23

27

32

-1-Q4 2004 Market Report-BR-TM-NYC-10Mar05.ppt

Global Investment-Banking Outlook


GLOBAL INVESTMENT BANKING REVENUES GREW BY 14 PERCENT TO $184 BILLION GLOBALLY IN 2004

Investment banking revenues grew by 14 percent from 2003 to $184 billion globally

All three major businesses, corporate finance, equities and fixed-income trading, grew significantly from 2003

• Fixed-income trading benefited from a steep yield curve in the first half of 2004• Equities trading was supported by the growing hedge fund industry• Pent-up demand in equities underwriting and several mega acquisitions led to a

significant increase of corporate finance and advisory revenues

Investments into growth areas such as commodities trading and prime brokerage led to a slight decline in profitability

• Average profit margins of the leading ten banks decreased slightly from 32.0 percent to 30.5 percent

Bear Stearns and Citibank were among the most profitable investment banks in 2004• Citibank achieved pre-tax profit margins of over 40 percent, while Bear Stearns

generated 37 percent in pre-tax profits


GLOBAL INVESTMENT BANKING REVENUES EXPECTED TO EXCEED $210 BILLION BY 2007

Investment banking industry is expected to grow at a measured rate of five percent annually until 2007

• Commoditization in equities and a slow down in fixed income will compress profit margins slightly

M&A Advisory is expected to grow faster than its long-term growth rate• Industry consolidation and friendly market conditions will spur advisory and equities

underwriting businesses• Strong Euro may prompt some U.S. acquisitions by European companies

Hedge funds and equities derivatives will be key growth drivers of equities business in the next two years while proprietary trading revenues are expected to stay stable

Increasing interest rates in the U.S. are leading to slower growth in fixed income. However, overall global fixed income revenues will remain robust

• Commodities and foreign exchange trading continue to grow• European interest rates are unlikely to increase soon


GLOBAL INDUSTRY REVENUES ARE EXPECTED TO GROW EXCEED $210 BILLION BY 2007

Global Investment Banking Revenues


Note: CF&A stands for corporate finance and advisorySources: Company financial reports; BCG analysis and forecasts

35 47 50

3944

62

87

97

101

0

50

100

150

200

250

2003 2004 2007

$B

Global

Equities

Fixed Income

CF&A

Global Investment BankingProfits

7 10 1412

1317

3132

30

0

25

50

75

100

125

2003 2004 2007

$B

4955

61

161

184

213

INVESTMENT-BANKING RESULTS OF LEADING PLAYERS IMPROVED SIGNIFICANTLY IN 2004

2004 vs. 2003

Pre-tax profitmargin (%)

2003

2004

0%

10%

20%

30%

40%

50%

2.5 5.0 7.5 10.0 12.5 15.0 17.5

Revenues($B)Ø +12.9%

Ø–1

.6%

LB

ML

GS

MS

JPMC(1)

CitiBS

2004 Ø: 30.5%

2003 Ø: 32.0%

DB

CSFB

UBS


(1) JPMC only, not including Banc OneNote: Ø calculated on a revenue-weighted basis; operating revenue for investment banking and institutional sales and tradingSources: Company reports, BCG analysis

REVENUES IN CORPORATE FINANCE AND ADVISORY ARE PROJECTED TO GROW TO $50 BILLION BY 2007

Investment Banking DivisionRevenues

Investment Banking DivisionRegional Revenue Split 2004

11 1317

1014

1614

20

17

0

10

20

30

40

50

60

2003 2004 2007

$B

35

4750

0% 25% 50% 75% 100%

M&A

ECM

DCM

AsiaEuropeAmericasDCM(2)ECM(1)M&A


(1) Equity Capital Markets(2) Debt Capital MarketsSources: Company financial reports; Thomson SDC; Dealogic; BCG analysis and forecasts

GLOBAL EQUITIES REVENUES EXPECTED TO REACH $62 BILLION BY 2007

Program Trading and Global Equity Finance Show Strongest Growth

Revenue Pools By Products Equities TradingRegional Revenue Split 2004

16 1824

55

813

14

20

44

5

0

20

40

60

80

2003 2004 2007

$B

3944

62

0% 25% 50% 75% 100%

Cash

Program

Global EquityFinance

EquityDerivatives

AsiaEuropeAmericasGEF(1) Arb/PropCash Program Derivatives


(1) Global Equity Finance – Includes prime brokerage (~80%) Sources: Company financial reports; BCG analysis and forecasts

CREDIT AND FOREIGN EXCHANGE PRODUCTS DRIVE FUTURE GROWTH IN FIXED INCOME

Revenues from Interest Rate Businesses Are Expected to Contract

Revenues($B)

19 20 17

9 10 9

17 20 23

56 8

1820 20

99 9

5

66

965

0

20

40

60

80

100

2003 2004 2007

10197

87

Interest Rates

Foreign Exchange

Interest RateDerivatives

Credit Deriv.

Credit Markets

MBS/ABS

Commodities

Other(1)

(1) Includes principal finance and real estate investmentsSources: Company financial reports; BCG analysis and forecasts


Investment Banking Results 4th Quarter 2004


INVESTMENT-BANKING PROFITS IMPROVED IN THE FOURTH QUARTER 2004

Strong Growth in Corporate Finance & Advisory

BCG performance index increased by almost 20 points to 95.7 in 4th quarter 2004

Strong revenue growth in sales and trading as well as corporate finance and advisory• Trading revenues of ten leading banks increased by nine percent on average from 3rd

quarter • Corporate finance and advisory businesses generated 19 percent more revenues than

in the previous period

Average profitability of the banks improved in fourth quarter 2004• Profit margins increased by four percent to 30.7 percent in 4th quarter 2004

Goldman Sachs and Morgan Stanley recorded big profit margin improvements• Profit margins at both banks increased by 10 and 14 percent respectively, partially

caused by offsetting compensation expense which was accrued in the previous three quarters

-11-Q4 2004 Market Report-BR-TM-NYC-10Mar05.pptSource: Company reports, BCG analysis

BCG PERFORMANCE INDEX ENDED 2004 ON THE UPSWING

95.7

76.6

98.9

127.6

87.491.096.2

90.5

48.244.7

71.2

51.860.2

80.1

100.0

76.7

0

20

40

60

80

100

120

140

Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04 Q4/04

BCG Investment BankingPerformance Index

Index

2001 2002 2003 2004


Note: The BCG IB performance index is calculated based on aggregate profits of 10 leading banks Source: Company reports, BCG analysis

STRONG RECOVERY OF INVESTMENT-BANKING BUSINESSES IN FOURTH QUARTER 2004

0

100

200

300

400

Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

M&A Advisory(1)

0

20

40

60

80

Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$BEquity Origination

$B

0

2

4

6

8

10

Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/040

200

400

600

800

1,000

1,200

Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$BU.S. Bond Trading(2)

$TrEquity Trading

U.S.

Asia

Europe


(1) Announced transactions(2) Daily average trading volumes for treasuries, agencies, asset-/mortgage-backed securities (ABS/MBS), and corporate bondsSources: Dealogic; SDC; FIBV; Federal Reserve Bank of New York; BCG analysis

REVENUES AND PROFIT MARGINS IMPROVED IN 4TH QUARTER 20044Q04 vs. 3Q04

Pre-tax profit margin (%)

Revenues($B)


(1) JPMC only, not including Banc OneNote: Ø calculated on a revenue-weighted basis; operating revenue for investment banking and institutional sales and tradingSource: Company reports; BCG analysis

Ø +12.6%

Ø+3

.9%

0%

10%

20%

30%

40%

50%

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

ML

GSMS

CitiBS

DB

UBS

Q3/04

Q4/04

JPMC(1)

Q4/04 Ø: 30.7%

Q3/04 Ø: 26.8%

CSFB

LB

TRADING AND INVESTMENT BANKING GREW STRONGLY IN 4TH QUARTER 2004

55%

60%

65%

70%

75%

80%

85%

90%

0.5 1.0 1.5 2.0 2.5 3.0

Trading Revenues4Q04 vs. 3Q04

3Q04

4Q04

10%

15%

20%

25%

30%

35%

40%

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Corporate Finance/Advisory Revenues

4Q04 vs. 3Q04

MS

LB

Citi

GS

CF&A revenue aspercentageof totalrevenues4Q04

GS

LB

Citi

MS

ML

JPMC

Revenues($B)

Revenues($B)

Tradingrevenue aspercentageof totalrevenues4Q04

Ø +9.4% Ø + 18.9%

MLBS

BS

Ø: 74.0%Ø: 27.6%

JPMC

CSFB

DB

UBS

DB

UBS

CSFB


Note: Trading and corporate finance revenues do not total 100% because of “other” revenueSources: Company reports; BCG analysis

Market Review

Corporate Finance and Advisory


UNDERWRITING AND ADVISORY DEAL VOLUMES LEAPED IN FOURTH QUARTER 2004

Overall global M&A announcements in 2004 grew by 55 percent from 2003• Several big merger announcements - such as the merger of the British and the Dutch

parents of Shell and the planned acquisition of Nextel by Sprint - drove volumes up by 75 percent in the 4th quarter

Stronger stock markets in 2004 helped to increase global equities underwriting by 58 percent from 2003

• Pent-up demand from the previous years was main growth driver• Improving stock market led to strong growth in Europe. European equities

underwriting grew by 60 percent from 2003

While overall global bond underwriting volumes remained robust, corporate bond issuance decreased in 2004

• Increasing interest rates led to a slow down of corporate refinancing volumes in the U.S.


M&A and Equity OriginationM&A and Equity Origination

STRONG REVIVAL OF THE EQUITY CAPITAL MARKETS AND ADVISORY BUSINESS

Equity Capital Markets


Sources: Dealogic; SDC; BCG analysis

24 3017 15 22 22 20

39 39 34 33

5924

31

13 1510 17 22

2737

28 25

33

11

13

15 8 710

17

3838

21 22

28

0

20

40

60

80

100

120

140

160

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$B

59

74

Global

U.S.

Asia

Europe

4538 39

Announced M&A Deals

108 138 96154 164 122 111 131 156 127 130

312106133

149103 69

95 124

214

295

169 157

265

33

5838 48

42 60 42

57

53

87 85

75

0

100

200

300

400

500

600

700

800

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$B

247305

329283 27549

27759277

104

402

114

504

83383

80372

120

652


GOLDMAN SACHS AND MORGAN STANLEY REMAINED LEADERS IN GLOBAL M&A


0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Gainedshare

Lost share

Gained share

Lost share

European M&A

BNP

ABN

GS

DB

CSFB

ML

MS

Citi

JPMC

UBS Lazard

Calyon

Relative marketposition 2003

Greenhill

LBHSBC

U.S. M&A

Relativemarketposition2004


GS

DB

CSFB

ML

MSCiti

LB

UBS

BS

Lazard

Relative marketposition 2003

BNP

Rothschild

Cazenove

BoA

JPMC

HSBCSG

Wachovia SG

DKW

ING

Notes: Based on date effective relative to market leaderJPMC volumes include Bank One



MORGAN STANLEY WON SIGNIFICANT SHARE IN EQUITIES


0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Gained share

Lost share

U.S. Equity Capital Markets

Gained share

Lost share

European Equity Capital Markets

ABN

HSBC

GS

DB

CSFB

ML

MS

Citi

JPMC

UBS

BNP

Cazenove

Relative market-position 2003

ING

DKW

LBSG



GS

DB

CSFB

ML

MS

Citi

JPMC LB

UBS

BS BoA

Relative market-position 2003

Wachovia

Calyon

LazardSG

Notes: Share relative to market leaderJPMC volumes include Bank One


Fixed-Income OriginationFixed-Income Origination

GLOBAL BOND ORIGINATION REMAINED ROBUST

Corporate BondsAll Bonds

233 221 170 195332

471268 294

440 418 376 453

568493

437 460

640

711

560 511

632545 578

58543

66

5661

57

140

68 82

88

84 7771

0

250

500

750

1,000

1,250

1,500

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$B

844780

663716

1029

53 6328 38

6383

64 63 55 6243 40

9390

4355

86

128

80 7874 54

56 78

1828

18

22

22

28

18 2625

2623

18

0

50

100

150

200

250

300

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$B

164181

89

115

171

1322

239

887167

896162

1160

154

1047

141

1031

122

1109

136

Global

U.S.Asia

Europe


Note: Corporate bonds for industrial issuers onlySource: Dealogic; SDC; BCG analysis

Fixed-Income OriginationFixed-Income Origination

UBS GAINED LEADERSHIP IN EUROPEAN FIXED INCOME ORIGINATION

European Bonds Underwriting

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%Relative marketposition 2003

BNP

ABN

U.S. Bond Underwriting

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%Relative marketposition 2003



Gained share

Lost share


Notes: Relative to market leaderJPMC volumes include Bank One

Source: Dealogic; SDC; BCG analysis

HSBC

SG

Barclays

Gained share

Lost share

DB

CSFB

ING

MS

Citi

DKW

JPMC

LB

UBS

BoA

GSML

Coba

Calyon

Nomura

Barclays

GSDB

CSFB

MLMS

Citi

JPMC

LB

UBS

BS

Wachovia

BoA

Nomura

BNP

HSBCABN BS

Market Review:

Fixed-Income Trading


Fixed-Income TradingFixed-Income Trading

BANKS’ FIXED-INCOME SALES & TRADING FINISHED THE YEAR STRONGLY

2004 was a record year in fixed income trading

• A very strong first quarter 2004 led to an overall year-on-year increase in fixed income

• Global fixed income trading revenues of the leading banks increased by 6 percent from last year

As the U.S. yield curve continues to flatten, fixed income revenue growth is most likely to slow down

• Spread between 2-year and 10-year treasuries currently less than 100 basis points

• Measured interest rate increases are likely to continue in 2005

However, a dramatic fixed income revenue decline seems unlikely

• European interest rates are expected to remain low

• Growth in commodities and foreign exchange trading will support overall trading revenues



YIELD CURVE FLATTENED

10-year/2-year U.S. Treasury Yield Spread

-100

-50

0

50

100

150

200

250

300

Jan-97 Jan-98 Jan-99 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

Basispoints

-25-Q4 2004 Market Report-BR-TM-NYC-10Mar05.pptSource: Bloomberg


FIXED-INCOME REVENUES FINISHED THE YEAR STRONGLYFourth Quarter Revenues Increased

U.S. Daily Average Bond-Trading Volumes Fixed-Income Trading Revenues by Quarter

0

25

50

75

100

125

150

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

10088

102

130

8075

129

91

Index144

124

430 428 474 477 457530 556 498 558 598 563 581

133 137166 188 206

230 216

165

212205

200 214104 120

116 124206

149 148

140

144151

156161

0

200

400

600

800

1,000

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$B

667 685756

789869

909

803

920 914954

919

105

956

108

Total

MBS/ABS

Corp. Bonds

Treasury/Agencies


Note: Daily average trading volumes with inter/dealer brokers and others; aggregated trading revenues for 10 leading investment bankssurveyed

Sources: Federal Reserve Bank of New York; BCG analysis

Market Review

Equity Trading


Equity TradingEquity Trading

DECLINING TRADING VOLUMES AND LOW VOLATILITY AFFECTED EQUITIES TRADING BUSINESS

Rising stock prices led to improved trading volumes in the 4th quarter 2004• S&P 500 stock index increased by nine percent, while the FTSE E300 and the Nikkei were

up six percent in the last quarter 2004• As a result, global stock exchange trading increased by almost two trillion U.S. Dollars to

$10.9 trillion in the 4th quarter

2004 was a strong year in equities trading. For the first time since 2000, equities trading revenues overall improved. Several trends continue to shape the equities trading business:

• Hedge fund growth: Hedge fund asset growth creates prime brokerage business opportunities for several players. But hedge funds also contributed significantly to overall cash revenues

• Low market volatility: The VIX market volatility index fell in 2004 and is now more than 50 percent below its year end level 2002

• Increase in program trading continues to depress commissions: Program trading volumes at the New York Stock Exchange increased by 30 percent from 2003 to 2004



EQUITIES MARKET VOLATILITY REACHED LOWEST LEVELS SINCE 2000

Market Volatility Index (VIX) Percentage change

0

10

20

30

40

50

60

J A J O J A J O J A J O J A J O J

0%

-27%

-54%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Q4/04 vs.3Q04

2004 vs. 2003 2004 vs. 2002Q1/02Q3/01 Q3/02 Q1/03Q1/01 Q3/03

Index

Q1/04 Q3/04


Source: Bloomberg


STOCK PRICES CONTINUED TO RISE IN 4TH QUARTER

Development of Main Equity Indices Percentage change

0

20

40

60

80

100

120

J A J O J A J O J A J O J A J O J

Nikkei 225 S&P 500

FTSE E300

Q1/02


(1) Indexed Source: Thomson Financial Datastream

S&P 500

Nikkei 225

FTSE E300

Q3/01 Q3/02 Q1/03Q1/01 Q3/03

Index

Q1/04

6% 9% 6% 9% 9% 8%

-50%

-30%

-10%

10%

30%

50%

Change 4Q/04 vs. 3Q/04

Change 2004 vs. 2003

Q3/04


EQUITY TRADING VOLUMES AND REVENUES IMPROVED

Global Exchange Trading Volumes

Global

U.S.

Asia

Europe

2,4 2,7 2,4 2,3 2,2 2,5 2,6 2,8 3,6 3,4 3,0 3,6

5,1 4,94,4 4,3 3,8

4,5 4,6 4,7

5,54,5 4,7

5,7

1,0 1,00,8 0,8

0,8

1,1 1,4 1,6

1,9

1,8 1,4

1,6

0

2

4

6

8

10

12

14

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

$Tr

8.5 8.67.6 7.4

6.8

8.1 8.69.1

Equity Trading Revenue by Quarter (Indexed)

0

20

40

60

80

100

120

140

Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04

%

100 104

9081

87

107100 98

126

10111.0

9.79.1 89

10.9110


Note: Single counted, includes investment funds traded at exchanges; aggregated trading revenues for 10 leading investment banks surveyedSources: FIBV; BCG analysis

Data Definitions


DATA DEFINITION OVERVIEW

Regional deal allocation is based on issuer’s country (parent issuer’s country, where available). M&A deals are allocated by target nation

Dealogic was used for European capital market data, Thomson SDC for U.S. and Asian data

Relative market shares are based on bookrunner league tables

Equity origination data include common stock IPOs and secondary issues only

Bond origination data contain all convertible and nonconvertible bonds, including ABS, MBS, municipals, agency, and corporate bonds

Corporate bonds are limited to industrials and utilities excluding financial services issuers

Equity trading data reflect institutional block trades as advertised in AutEx BlockDATA

The second quarter ended on November 30, 2004, for Bear Stearns, Goldman Sachs, Lehman Brothers, and Morgan Stanley; all others ended on December 31, 2004


INVESTMENT BANKING AND CAPITAL MARKETS - … BANKING AND CAPITAL MARKETS ... Q4 2004 Market...

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