Investment Banking and Capital Markets - BCG Banking and Capital Markets ... • Underwriting and...
Transcript of Investment Banking and Capital Markets - BCG Banking and Capital Markets ... • Underwriting and...
Investment Banking and Capital MarketsMarket Report — Third Quarter 2008
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Contents
Overview of third quarter 2008 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
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The third quarter of 2008 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 risk-taking 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
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Investment banks fell deeper in the red during the third quarterMarket 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 90% 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 -105 to -164 (Q1 2006 = 100)
– 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 activitiesFixed income and equity trading• Fixed income and equity sales and trading revenues went negative again (-$8.0 billion) after a recovery in Q2 ($7.0 billion)• Fixed income revenues dropped to -$17.5 billion, due to further write-downs• Equity trading activities fared better, generating revenues of $10.1 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 $9.6 billion in Q2• Although M&A activity increased, revenues were flat• As confidence left the market, underwriting activity and thereby revenues fell precipitously, particularly for bonds
Note: The survey was expanded from nine investment banks (Q2 report) to include Bank of America, Société Générale, and BNP Paribas. Revenues by activity exclude BNP Paribas, for which disaggregated data are not available. Source: BCG analysis
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After two quarters of reduced losses, industry performance deteriorated during the third quarter
126 109163 158
127180
229 212
-551
-382
-207
100 9571
107135 128
-11
-327
-203-164-313
-23
-105
-650
-550
-450
-350
-250
-150
-50
50
150
250
Q4/05 Q2/06 Q4/06 Q2/07 Q4/07 Q2/08
Original Performance Index Updated Performance Index
BCG Investment Banking Performance Index
Index
(Q1/01 = 100; includes 9 banks listed in footnote)
(Q1/06 = 100; adds Bank of America,BNP Paribas, and Société Générale)
-207
-105
2005 2006 2007 2008
Note: The index tracks gross operating profit. The original index includes Bear Stearns (through Q1 2008), Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman (through Q3 2008), Merrill Lynch, and Morgan Stanley. The updated index adds Bank of America, BNP Paribas, and Société Générale. For Q3 2008, the financials of acquired firms and operations were not yet consolidated into the acquirer's financials.Source: Company reports; BCG analysis
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Investment banks battled to lower expenses as revenues continued to deteriorate
-10
-5
0
5
10
0 1 2 3 4 5 6
UBS
DB
CS
Net revenues($B)
SG
Gross oper. exp.($B)
JPMC
Citi
ML
BoA
BNPP
MS
GS
LEH
Source: Company reports; BCG analysis
Net revenues and gross operating expenses of 12 investment banks, Q2 and Q3 2008
= Q2 2008 = Q3 2008
Negative revenues
Break-even
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Third quarter revenues were weighed down by trading write-downs
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
($B)
ML
LEH
CS
Citi
UBS
MS
JPMC
GS
BNPP*
DB
SG
BoA
Net revenues of 12 investment banks: Q3 2008 vs Q3 2007
Underwriting & M&A advisory revenuesTrading revenues
15.0
-8.0
10.5
7.9
25.5
3Q07 Total
-0.1
3Q08 Total
MS JPMC GS BNPP1 DB SG BoA CS Citi UBS ML2 LEH
Aggregated Net Revenues1
($B)
Q3 07
Q3 07 Q3 08
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 2008.Source: Company reports; BCG analysis
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Contents
Overview of third quarter 2008 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
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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 $10.1 billion, down 34% from Q2 and 26% from the same
period last year– Trading volumes declined 3% in the quarter and were 13% lower than the same period
last year
Note: Revenue figures are for 11 investment banks; figures exclude BNPP, for which disaggregates were not available.Source: BCG analysis
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Fixed income revenues slid further into the red
-17.5
-8.9
-24.4
-54.4
1.8
28.031.0
23.322.824.925.9
-60
-40
-20
0
20
40
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208
($B)
Q308
Fixed income trading
U.S. weekly average bond-trading volumesU.S. weekly average bond-trading volumes Fixed income trading revenuesFixed income trading revenues
0
500
1,000
1,500
Q107
1,179
Q207
1,277
Q307
1,226
Q407
1,411
Q108
1,173
Q208
1,1531,070
Q206
1,037
Q306
1,065
Q406
-2%
1,107
Q106
Treasury/Agencies
MBS/ABS
Corp Bonds
($B)
1,148
Q308
Note: Trading volumes single counted, includes investment funds traded at exchanges; aggregated revenues for 11 investment banks surveyed (excludes BNPP, for which data were not available).Source: Federal Reserve Bank of New York; BCG analysis
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Equity trading revenues continued to slide
Equity trading
10.1
15.416.817.4
13.6
19.820.4
14.0
9.4
13.4
16.4
0
5
10
15
20
25
Q308Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208
-34%
($B)
Global-exchange trading volumesGlobal-exchange trading volumes Equity trading revenuesEquity trading revenues
0
5
10
15
20
25
30
18.7
Q206
15.5
Q306
18.2
Q406
22.1
Q107
25.023.6
27.0
Q307
26.3
Q407
26.2
Q108
24.3
Q208
EMEA
Asia
Americas
-3%($T)
Q308
17.6
Q106 Q207
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
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Contents
Overview of third quarter 2008 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
12
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 $641 billion,
while the number of deals fell 2%– Deal value grew strongest in the Americas (27%)
• M&A advisory revenues, however, were flat compared to the previous quarter and were down one-third compared to the same period last year
– Goldman Sachs and JPMorgan continued to take the highest share of global M&A advisory revenues
Underwriting• After a brief recovery in the second quarter, revenues from underwriting activities slid
during the third quarter, with DCM and ECM revenues falling 52% and 37%, respectively– Due to steep declines in originations in both markets– Morgan Stanley bucked the trend by growing both DCM and ECM revenues, while
Goldman Sachs was able to grow its DCM revenue• Equity origination fell by 35%, with sharp declines in EMEA and Asia Pacific• Debt origination declined 49%, with precipitous drops in the Americas and EMEA
Note: Revenue figures are for ten investment banks; excludes BNPP and Société Générale, for which disaggregates were not available.Source: BCG analysis
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After a brief recovery, revenues from underwriting and M&A advisory activities fell
-5
0
5
10
15
9.5
Q106
10.5
Q206
9.5
Q306
12.6
Q406
12.5
Q107
14.4
Q207
10.1
Q307
12.5
8.6
3.8
Q1081
10.0
Q208
7.2
Q308
ECM
DCM
M&A
-28%
Q305
9.3
Q405
($B)
Q407
Global underwriting and M&A advisory revenues
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
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M&A activity strengthened in the third quarter while underwriting levels fell precipitously
Effective M&A dealsEffective M&A deals Equity issuanceEquity issuance Bond issuanceBond issuance
36
79
1653
43
61
43
73
70
76
29
29
27
59
14
0
100
200
300
100
Q308
149
Q307
216
Q407
88
Q108
155
Q208
Asia-Pacific
Americas
EMEA
-35%
($B)
384 359 406
634
709609 557
690
80
112 97
125
331
309
101
0
500
1,000
1,500
741
Q308
1,173
Q307
1,081
Q407
1,060
Q108
1,449
Q208
-49%
($B)
274
473392
240
470
579
254
231
126
134
80
80
273
294
75
0
500
1,000
1,500
641
Q308
870
Q307
1,186
Q407
725
Q108
551
Q208
+16%
($B)
Source: Thomson SDC; BCG analysis
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Banks gained on the M&A leader, Goldman Sachs, but lost share to the underwriting leader, JPMorgan
Relative share of M&A revenuesRelative share of M&A revenues Relative share of underwriting revenues1Relative share of underwriting revenues1
0
20
40
60
80
100
0 20 40 60 80 100
GSJPMC
MS
MLCS
LEHCiti
DBUBS
BoA
Relative Market Position 3Q07
Relative Market Position 3Q08
0
20
40
60
80
100
0 20 40 60 80 100
JPMC
GSMS
UBS
BoAML LEH
CSFB
Relative Market Position 3Q07
Relative Market Position 3Q08
Gained share relative to #1
Lost share relative to #1
1. Citigroup and Deutsche Bank recorded write-downs leading to negative net revenues in 3Q08; DB in 3Q07.Note: Market position expressed relative to market leader.Source: Thomson SDC; BCG analysis
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The crisis has created a new order in the underwriting league tables
Share of global DCM, 2006 and Q3 2008 YTDShare of global DCM, 2006 and Q3 2008 YTD Share of global ECM, 2006 and Q3 2008 YTDShare of global ECM, 2006 and Q3 2008 YTD
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 14th to 4th.Source: Thomson SDC; BCG analysis
0
2
4
6
8
10
% Market Share
BoA-ML
BarCap-Leh
JPMC-BSC
DB Citi RBS CS UBS MS GS
2006Q3 2008 YTD
0
2
4
6
8
10
12
14
JPMC-BSC
BoA-ML
Citi GS MS UBS BarCap-Leh
DB CS WF-Wach.
2006Q3 2008 YTD
% Market Share
Moved from 12th to 2ndMove from 6th to 1stMoved from 7th to 2nd
Moved from 11th to 1st
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Contents
Overview of third quarter 2008 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
18
Collateral damage: The credit crisis is driving a downturnin the real economy
… is driving a downturn in the real economy
… is driving a downturn in the real economyWhat began as a credit crisis …What began as a credit crisis …
Credit crisis in US real
estate1
Leverage crisis in the
securitization market
2
Global liquidity crisis3Solvency crisis4
Further reduction
in asset values5
Lower investment
1
Lower output2
Corporate defaults and job losses
3
Lower demand4And no capacity
for consumers to borrow more
(absent inflation)
Corporate credit crunch and cash flow/
liquidity crisis
Source: BCG analysis
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The result is a recession exacerbated by a credit crunch, equity crash, and real estate bubble
Number of occurrencesNumber of occurrences
10
35
1
189
31
Credit/bankingcrunches
Housingpricecrashes
Equitymarketcrashes
Only 5th occurrence of simultaneous credit crunch,
housing price crash, and equity market crash
Financial stress worsens the effect of downturn
Financial stress worsens the effect of downturn
-1.6
-2.8
1.75×
Not preceded by financial
stress
-2
-4
2
0
Preceded by financial stress
-2.3
-4.4
1.9×
Not preceded by financial
stress
Preceded by financial stress
Slowdowns Recessions
Banking-related stress is typically 2–3× as
deep and 2–4× as long
Cumulative output loss median (in % of GDP)
Source: BCG analysis; IMF
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Acting fast can create significant value
Label 1 10/08 Label 3 Label 3 Label 3 Label 3 Label 3 Label 3
OverreactsExpenses
Crisis
Example of two different companies –based on research from prior recession
Time
Weak crisis management results in overshooting: Too late! Too much! Too random!
Expensive recovery
Company A• Limited, tentative responses• Overreacts late in the game• Expensive recovery
Company B• Acts fast• Measured response
Fast, measured response
Limited, tentative responses
Source: BCG analysis
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Five key levers in a rapid response to the crisis
Aggressively manage cost
Short term cost focus – discretionary spending
Structural changes to cost – coverage, research, technology platforms, etc.
1
Secure revenuesProtect core customers / franchises
Adapt product portfolio to changing customer needs
2
Review business portfolio
Portfolio choices – growth, profitability, capital requirements, riskAcquisition opportunities to build scale / capabilitiesDivestitures to enhance focus, free up capital
3
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
4
Redesign organization('Delayering')
Redesign spans and layers for efficiency and effectiveness
Place right talent in redesigned roles
5
BCG has developed a set of tools to help clients address each of these levers
Source: BCG analysis
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Contents
Overview of third quarter 2008 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
23
BCG investment banking contacts
Achim SchwetlickPartner and Managing DirectorNew York+1 212 446 2800
Robert GrübnerPartner and Managing DirectorFrankfurt+49 69 9 15 02 0
Chandy ChandrashekharPartner and Managing DirectorNew York+1 212 446 2800
[email protected] [email protected] [email protected]
Ranu DayalSenior Partner and Managing DirectorSingapore+65 6429 2500
Shubh SaumyaPartner and Managing DirectorNew York+1 212 446 2800
Tjun TangPartner and Managing DirectorHong Kong+852 2506 2111