Investment Banking and Capital Markets · Investment Banking and Capital Markets ... Contents...

Investment Banking and Capital MarketsMarket Report — Second Quarter 2009

1BCG Q2_2009_FINAL DRAFT 9-8-09.ppt

Contents

Overview of second quarter 2009 results 1

Market review• Fixed income and equity trading 8• Underwriting and M&A advisory 12

Focus: Building a lean, efficient risk management organization 17


The rebound in investment banking performance slowed during the second quarter

After a strong rebound in Q1, revenue growth slowed in Q2• The net revenues of the banks in BCG's performance index totaled $55 billion in Q2 2009, which was nearly 200% above

Q2 2008 ($19 billion) and 13% above Q1 2009 – The rebound was fueled by a significant decline in write-downs, which totaled $11 billion, down from

$16 billion in the prior quarter and $44 billion a year earlier– Excluding write-downs, net revenues climbed to $67 billion, up from $66 billion in Q1, but remained 7% below the

precrisis peak of $72 billion (Q1 07)– For the first quarter since the crisis began, every bank's net revenues were in the black

• Gross operating expenses grew less than revenues, up 8% from the prior quarter– But they were 4% below a year prior and 18% below two years prior

As a result, the BCG Investment Banking Performance Index climbed back to 100 (Q1 2006 = 100)• All but two of the 12 banks in BCG's index generated positive gross operating profits

Performance during Q2 varied widely across major investment banking activitiesFixed income and equity trading• The rebound in fixed income revenues stalled with revenues slipping 5% to $27.2 billion1 during the quarter, $3.8 billion shy

of the precrisis peak (Q1 07) • Equity trading revenues slumped 2% despite an uptick in volumes; they totaled $12.2 billion1, which was far below the

precrisis peak ($20.4 billion Q1 07)Underwriting (ECM and DCM) and M&A advisory• Underwriting revenues surged, nearly doubling to $8.1 billion2 as capital- and credit-hungry corporations hit the market• In sharp contrast, M&A revenues continued to dry up as deal volume fell further (down 23% to $1.9 billion2)

1. Excludes Barclays Capital, BNPP, and Nomura, for which data were not available. 2. Excludes the latter three and Société Générale, Source: BCG analysis.


The industry's performance is back to 2006 levelsRecording its second profitable quarter in a row since the crisis began

9369

103132 126

-197

-98

-162

82100

-14

100

-293

-392-400

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

200

250

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209

Performance Index

BCG Investment Banking Performance Index

Index(Q1/06 = 100)

2006 2007 2008 2009

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.Source: Company reports; BCG analysis.


Lower write-downs and stronger underwriting activity drove revenue growth during Q2 2009

1.8

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

1.9

5.6

3.3

5.5

3.6

2.2

3.1 2.9 2.8

0.4

2.2

-2.1

1.9

1.01.8

($B)

6.7

11.0

5.2

7.9

1.2

7.8

2.8

5.7

Net revenues: Q2 2008 vs Q2 2009(in descending order of net revenues for Q2 09, which are in bold)

GS2 JPM Citi DB BoA3 CS BN Bar- MS2 No- UBS SGPP4 Cap mura

Aggregated net revenues1

Underwriting & M&A advisory revenuesTrading revenues including net write-downs

Q2 08 Q2 09

1. Excludes BNPP, for which disaggregated data were not available, and "other" capital markets revenues reported by Deutsche Bank, Credit Suisse, and Citigroup. Includes BarCap.2. Q2 08 ended in May; Q2 09 ended in June. 3. Includes Merrill Lynch for both quarters. 4. Reflects total of both; disaggregated data n.a.Source: Company reports; BCG analysis.

($B)

7

41 4351

57 55

12

8 12

12

812

63

49

Q109

Underwriting & M&A

+13%

Trading excl. write-

downs Trading incl.write-downs

55

Q209Q208

66

Q109

19

Q208

67

Q209

Excluding netwrite-downs

Including net write-downs


Risk exposure remained relatively high

Banks have had mixed results in lowering risk exposure1

Banks have had mixed results in lowering risk exposure1

Banks earned less trading revenues relative to risk exposure

Banks earned less trading revenues relative to risk exposure

0

10

20

30

40

50

60

70

80

GSCS

Trading rev./VaR

Q209Q107

MSUBSSGJPMBoADBCiti

(sorted by Q209)

-30

-25

-20

-15

-10

-5

0

5

10

15

20

DB

Q408-Q209(%change)

VaR

UBS CSSG GS

RWA

MS

1. RWA = risk-weighted assets. RWA for Corp/Investment Bank at UBS, CS, DB; for entire bank at GS and MS. Other banks do not report RWA for CIB.Note: VaR is average for quarter for UBS, CS, DB, and SG and period end for MS and GS.Source: Company reports; BCG analysis.


Operating expenses are rising againHowever, overall revenue growth of 13% outpaced expenses

Few banks achieved positive operating leverage1

Few banks achieved positive operating leverage1

Operating expenses remain below peak levels but are steadily creeping up

Operating expenses remain below peak levels but are steadily creeping up

0

2,000

4,000

6,000

8,000

GS DB JPM CS MS Citi BoA BarCap

UBS BNPP

No-mura

SG

Q1 07Q1 09Q2 09

Op.exp. ($M)

Avg. 8% Q109-Q209

(sorted in descending order Q2 09)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

DB

CS

JPMC

Citi

MS

GS

BoA BNPP

SG

0% 10% 20% 30% 40% 50% 60%-10%-20%-30%-40%

Net rev. ∆ Q1-Q2 (%)

Op.exp. ∆ Q1-Q2 (%)

Costs upRevenues down

Costs downRevenues down

Negative operatingleverage

Positive operatingleverage

Costs upRevenues up

Notes: For GS and MS, Q1 07 ended in February and Q1 09 ended in March. For comparability, BoA includes ML, and JPM includes Bear Stearns across quarters. 1. Excludes Nomura whose net revenue growth is off the chart, 1175% and UBS whose net revenue in Q1 was negative, effectively resulting in a 737% net rev. growth. Source: Company reports; BCG analysis.


Bank performance varied widely, and only two banks improved both revenues and profit margin

-20

-10

0

10

20

30

40

50

60

70

0 2,000 4,000 6,000 8,000 10,000 12,000

DB

CS

JPM

Citi2

MS

GS

BoA

BNPP

SG

Nomura1

Net rev. ($M)

UBS1

Pre-tax profit margin (%) LegendBoth margin and revenues declinedBoth margin and revenues improvedOne improved while other declined or remained the same

Q109Q209

Note: BarCap profit margin for 1H is 12%.1. Profit margin for UBS is not meaningful for Q1 09; Nomura's Q1 09 margin = -1075%. 2. Citi's relatively high margin is due to above average net revenue growth (8% compared to -16%, quarterly change between Q2 09 and Q1 07, the industry's peak) and above average cost reduction (-25% compared to -16%).Source: Company reports; BCG analysis.


Contents





Fixed income and equity trading revenues fell slightly

Following a sharp rebound in Q1, revenues from fixed income trading fell slightly in Q2• Net revenues from fixed income trading declined by 5% to $27.2 billion1; they were 12% off the Q1 2007

peak ($31.0 billion)• Revenues were dampened by the continued decline in average weekly US bond-trading volumes (-4%

in Q2 compared to -7% in Q1)• The decline in revenues occurred despite strong client flow in liquid products, sustained market volatility,

and relatively large spreads• Rates and credit generated the strongest results, followed by foreign exchange and commodities

– Asset class performance was not uniform across banks; some banks experienced a decline in rates, FX, and commodities

Likewise, equity trading revenues declined during Q2, despite improving market conditions• Net revenues slipped 2% to $12.2 billion1, far below the precrisis peak of $20.4 billion in Q1 2007

– Most banks reported solid client activity driven by improving market performance and lower volatility

– Several banks, however, reported declining commission revenues and prime brokerage revenues with the latter due to a continued decline in balances

• Trading volumes, however, increased by 13%– Asian markets recorded the strongest growth (48%), followed by Europe (29%)– European market activity, however, remained far off its peak (down 57% from Q3 2007)– In the Americas, trading inched up only 1%, and was nearly 25% below its peak level

1. Revenue figures are for 9 investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available.Source: BCG analysis.


Following a strong rebound, fixed income trading revenues declined

27.228.6

-49.1

-17.5

-8.9

-24.4

-54.4

1.8

28.031.0

23.322.824.9

-60

-40

-20

0

20

40

Q406Q206 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209

-5%($B)

Q306

Fixed income trading

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

1,411

Q108

1,173

Q208

1,153

Q407

945

($B)

Q109

908

Q209

Corp Bonds

MBS/ABS

Treasury/Agencies

1,018

Q308

-4%

1,070

Q206

1,037

Q306

1,065

Q406

1,148

Q107

1,179

Q408

Note: Trading data are for average weekly primary dealer transactions.1. Revenue figures are for 9 investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available.Source: Federal Reserve Bank of New York; company reports; BCG analysis.


Equity trading revenues slipped, despite an increase in trading volumes

Equity trading

12.212.4

-3.7

10.1

15.416.817.4

13.6

19.820.4

14.0

9.4

13.4

-5

0

5

10

15

20

25

Q109

($B)

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109

-2%

Q206 Q306 Q406

Global-exchange trading volumesGlobal-exchange trading volumes Equity trading revenues1Equity trading revenues1

0

5

10

15

20

25

30

Q406

22.1

Q107

25.0

Q207

27.0

Q307

26.3

Q407

26.2

Q108

24.3

Q208

23.6

Q308

23.5

Q408

18.6

Q109

EMEA

Asia

Americas

+13%

18.7

($T)

Q206

15.5

Q306

18.2

21.1

Q209

Note: Trading volumes single counted, includes investment funds traded at exchanges.1. Revenue figures are for 9 investment banks; figures exclude Barclays Capital, BNPP, and Nomura, for which disaggregates were not available.Source: World Federation of Exchanges; company reports; BCG analysis.


Contents





A quest for capital and credit drove up issuances, but the global recession stifled M&A activity

M&A activity continued to fall sharply as the global recession persisted• Deal value dropped 41% during Q2 09 to $279 billion, remaining below 2004 levels

– The drop was steepest in the Americas (-63%), followed by Europe (-21%)– In contrast, Asia-Pacific deal value increased 21%

• Revenues fell 23% to $1.9 billion1

– JPMorgan inched past Goldman Sachs to take the highest share of revenues – Competition intensified as four banks gained on these leaders

Underwriting revenues nearly doubled to $8.1 billion1

• ECM Revenues hit $3.8 billion, just 7% shy of their Q2 2007 peak of $4.1 billion– Equity issuances skyrocketed during Q2 (208%) fueled by financial institutions– The US market was the most active, accounting for a third of issuances

• DCM revenues grew 40% to $4.3 billion but remained 27% below the Q2 2007 peak– Revenue growth was driven by higher average margins, which counteracted the slowdown

in issuance– After an exceptional Q1, debt issuances grew only 1%– The big engine – investment grade issuance – stalled, as did government issuance

• JPMorgan had the highest share of underwriting revenues – its revenues doubled during Q2

1. Revenue figures are for 8 investment banks; excludes Barclays Capital, BNPP, Nomura, and Société Générale, for which disaggregates were not available. Source: BCG analysis.


Underwriting revenues surged while M&A revenues slipped

0

5

10

15

DCM 2

M&A

+51%

($B)

8.6

Q305

9.3

Q405

9.5

Q106

10.5

Q206

9.5

Q306

12.6

Q406

10.0

Q107

14.4

Q207

11.6

Q307

12.7

Q407

7.9

Q108

10.8

Q208

8.3

Q308

6.8

Q408

6.6

Q209Q109

ECM

12.5

Global underwriting and M&A advisory revenues1

1. Revenue figures are for 8 investment banks; excludes BNPP, Société Générale, Barclays Capital, and Nomura, for which disaggregates were not available.2. To be consistent with majority of banks, for Citigroup and Deutsche Bank, write-downs and recoveries included in DCM are added back and are deducted from fixed income trading.Source: BCG analysis.


Equity activity rebounded while bond issuance flattened and M&A activity continued to slide

Effective M&A dealsEffective M&A deals Equity issuanceEquity issuance Bond issuanceBond issuance

79

1653

27 31 25

61

43

73

59 54

20

76

29

29

14 21

19

44

106

47

0

100

200

300

Q209

197216

Q407

88

Q108

155

Q208

100

Q308

106

Q408

64

Q109

Asia-Pacific

Americas

EMEA

+208%

($B)

359 406

634

219

691

609 557

690

262

632112 97

125

97

152

659

634

190

0

500

1,000

1,500

Q209

1,483

1,081

Q407

1,060

Q108

1,449

Q208

101

309

331

741

Q308

578

Q408

1,475

Q109

+1%

($B)

498 427265 294 247

154 122

591

288

258302

306

270

101

155

104

9286 156

0

500

1,000

1,500

57

Q209

279

1,244

Q407

819

Q108

615

Q208

682

Q308 Q408

47471

Q109

-41%709

($B)

Source: Thomson SDC; BCG analysis.


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

JPM GS

BoAMS

UBS

CSCiti

DB

Q208

Q209

0

20

40

60

80

100

0 20 40 60 80 100

JPM

BoA1

GSCiti

DBMS

UBS

CS

Q208

Q209

Gained share relative to #1

Lost share relative to #1

Gained share relative to #1

Lost share relative to #1

Competition stiffened and new leaders emerged

#1 Q2 2008

#1 Q2 2009#1 Q2 2009 #1 Q2 2008

(Q209 compared to Q208) (Q209 compared to Q208)

1. For comparability, BoA includes ML and JPM includes Bear Stearns across quarters. Note: Market position expressed relative to market leader (leader = 100). Right chart excludes DB due to write-downs in 1Q08; its revenues were still negative after the write-downs were added back. Disaggregates not available for Barclays Capital, BNPP, SocGen, and Nomura.Source: Company reports; BCG analysis.


Contents





Many large banks are burdened by a large and complex risk management structure

Sub-committeesWorking committees

Board of Directors

Risk Committee Audit & Examining Committee

Senior Risk Mgmt. Committee

Asset Liability Mgmt. Committee

Credit Portfolio Mgmt. Committee

Market Risk Committee

Strategic Risk Committee

Fiduciary Risk Mgmt. Committee

Basel Executive Oversight Committee

Controls Committee

Compliance & Ethics Committee

AML Oversight Committee

Sensitive Issues Oversight Committee

Disclosure Committee

Legal Entity Oversight Committee

Credit Port. Mgmt. –Segment A

Credit Port. Mgmt. –Segment B

Credit Port. Mgmt. –Segment C

Credit Port. Mgmt. –Region A

Credit Port. Mgmt. –Region B

Portfolio Review

Credit & OpRisk Measurement

Risk Quantification & Modeling

Investment

BNYCMI Capital & Commt. AdvisoryNet Interest Income

Intraday Liquidity Mgmt.

Liquidity Contingency Team

European ALCO

Foreign Branch Liquidity

Transfer Pricing

Treasury Risk

FX Hedging

Region A

Region B

Region C

Subsidiary A

Subsidiary B

Enterprisewide technology

Institutional trust

Managed funds

Proxy Policy

Wealth management

US Basel II Steering

Business Practices

International Subsidiary ABC

Region A

Subsidiary A

Subsidiary B

Operational Risk Committee

Other Board-Level Committees...

Asian ALCO

Excessive number of committees and participants are common

• 50+ committees• 250+ voting members• Resulting in thousands of hours spent in

committee

Growing regulations and the financial crisis have led to the proliferation of overlapping control functions

• Boundary between credit, market, and operational risk has been blurring

• Ever more intrusive head-office supervision has resulted in duplication of effort and endless second guessing of division-level risk management

• Mounting regulation (e.g., Basel II, MiFID, and SOX) has led to uncoordinated scope expansion of risk, finance, and compliance, resulting in significant boundary overlap

Illustra

tive

Business units snared in a growing web of restrictions, jeopardizing revenue growth and customer service


BCG applies a principle-based design approach to streamlining the committee structure

Develop committees based on a blank slate / zero based approach

Get the "committee basics" right• Each committee requires: clear mandate on risk, decision-making, formal communication processes

Eliminate most working committees and replace with processes – increase clarity of individual responsibility

• Embed activities currently occurring in committees into decision making processes (e.g., include sign-off by key decision makers for FX hedging decisions)

• Reduce logistical burden of committees (e.g., regular formal meetings, detailed minutes, tendency for membership bloat, etc.) when not required for proper governance

Limit voting members to key decision makers (e.g., cap at 12)

Ensure line-of-business representation in all committees – ensure lines-of-businesses own risk

Make meeting frequency default quarterly• More frequently if necessary (e.g., significant risk issues)


Banks can improve their risk management structures by reducing the number of committees by 40% to 60%

Other Board-Level Committees

Board of Directors

Risk Committee Audit & Examining Committee

Senior Risk Mgmt. Committee

ALCOEnterprisewide Credit Portfolio

Mgmt.

Basel Executive Oversight

Compliance, Ethics & Fiduciary RiskRegion A Risk

Region B Risk

Operational Risk

Large Projects Review & Approval

Strategic Risk Controls Disclosure

Legal Entity Oversight

Market Risk

Board level committeesSenior mgmt. oversight committees

Sub-committeesWorking committees

Ad hoc – as needed

Recommended committee structure based on key principlesRecommended committee structure based on key principles

Liquidity Contingency Team

Illustra

tive


An overhaul of the committee structure and clear mandates help to focus the oversight

0

20

40

60

80

100

Total Committees

today

Can be phased out

Can be eliminated

Can be merged

Can be a process

Committees remaining

To be added Final committee

total

# of Committees(indexed)

Phased outcommittees with high level of redundancy/overlap

Eliminatedcommittees with insufficient focus on risk

Mergedcommittees with similar purview/ mandates

Transformedcommittees whose function can be embedded in a process

Client example

Number of committees reduced by nearly half


Overlaps can be reduced by defining distinct levels of control and clear directives

• Identify and rate operational risks

• Report losses• Manage incidents

• Calculate risk limits and control respect of limits at fund level

• Monitor limits at fund level• Identify breaches, support

resolution and escalate to CRD when unsolved

• Calculate performance of funds

• Analyze performance attribution

• Control NAV provided byfund admin

• Calculate performance fees

• Respect permanent controls

• Report and manage breaches

Middle office Second level control

Middle office Second level control

• Implement operational guidelines

• Respect investment limits and defined risk return profile

• Propose new products, limits and investment processes

• Execute investment process and investment guidelines

• Respect regulatory and contractual requirements

Front office First level

control

Front office First level

control

• Review adequacy of operational risk organization to fulfill its mission

• Control standards and policies

• Test comprehensiveness of risk assessment

• Review adequacy of investment risk organization to fulfill its mission

• Review adequacy of PPA organization to fulfill its mission, test application of investment processes

• Review adequacy of internal control organization to fulfill its mission

• Test application of the internal control plan

Operationalrisk

Compliance and

internal control

Perfor-mance risk

and valuation analysis

Marketrisk

Inve

stm

ent r

isk

AuditThird level control

AuditThird level control

Core CRD (Capital Requirements Directive) scope

Group RM and ComplianceSecond level control

Group RM and ComplianceSecond level control

• Define risk policies • Implement risk policies • Review risk procedures• Manage and report escalated

incidents• Monitor business continuity plan

and IT security risks

• Define guidelines• Propose or set risk limits• Ensure consistency of risk profile

with mandate • Analyze limits at aggregated level• Analyze escalated breaches

• Review & report investment processes by (sub)expertise

• Analyze performance at fund or aggregated level

• Define perform. fee models• Define valuation methodology• Control consistency of valuation &

pricing with guidelines

• Identify reg. required procedures• Ensure compliance with regulations • Ensure compliance with internal and

contract requirements• Analyze escalated breaches


Committee structure overhaul leads to greater efficiency and accountability but requires careful execution

Faster, better decisions • Significantly less management time required: hundreds of hours of senior management time freed up• Turnaround time accelerated: 50% reduction in decision time is feasible• Accountability increased

– The more people own a decision, the less they care about it– Fewer committees result in fewer people accountable, raising sense of accountability and

responsibility• One version of the truth to support decision making

– Consolidate or eliminate overlapping systems– Reduce reconciliation requirements

Costs are minimal: primarily change management.• For a top tier financial institution, an overhaul plan can be developed within three months• Many benefits realizable within three more months; systems changes might take 18-36 months

Careful execution is required and there are several key success factors • Extensive stakeholder buy-in to undertaking principles-based design approach

– 60-100 interviews for a top tier FI• Buy-in from regulators also important. They need to know that this is strengthening risk management not

weakening it• Careful transition planning, including effective communication and training


How BCG works with clients to develop a risk governance overhaul plan

DeliverablesDeliverables

Baselining – diagnosis

Groundwork for operating model

Target operating model

Risk management dashboard

Deployment preparation

DescriptionDescription

Diagnose the current risk management organization within the group and lay the groundwork to define the target operating model

• Key information collected and analyzed• Key stakeholders interviewed• Non-risk FTEs involved in risk management identified• Key elements of the operating model identified• Preliminary options drafted

Define target operating model, which includes:• Risk governance principles• Global risk committees architecture• Roles and responsibilities along key risk management processes• Central risk organization and interaction with subsidiaries• Engagement model with finance and compliance

Design the risk dashboard template and production process• Which decisions need what information?• Where is this information found? • Is it correct, consistent, appropriate, comprehensive?• What needs to happen to make it so?

Prepare the deployment phase, which includes:• Key initiatives to be launched and high-level calendar• Migration path and gap analysis• Detailed initiatives charters• Communications program

Pha

se 1

(~5

wee

ks)

Pha

se 2

(~5

wee

ks)

Pha

se 3

(2 w

eeks

)

Investment Banking and Capital Markets · Investment Banking and Capital Markets ... Contents...

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