INVESTMENT BANKING & CAPITAL MARKETS · PDF fileINVESTMENT BANKING & CAPITAL MARKETS Market...

INVESTMENT BANKING & CAPITAL MARKETS

Market Report – Q3 2003 Edition

New York, Frankfurt

November 18th, 2003

THE BOSTON CONSULTING GROUP

-1-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt

TABLE OF CONTENTS

Chapter Page

Overview of 3rd quarter 2003

Market review

• Corporate finance

• Fixed income trading

• Equity trading

Data definitions

2

9

16

21

28


Overview of 3rd Quarter 2003


RISING INTEREST RATES AFFECTED INVESTMENT BANKING RESULTS IN THIRD QUARTER

BCG’s investment banking performance index declined by 3 points to 59.9 percent• Fixed income growth of the previous quarters ended • Revenues of top investment banks declined 13 percent from previous period

Investment banks improved their profit margins from 31% on average in the previous quarter to 33% in the current period

• U.S. investment banks in particular created a highly flexible cost base during the downturn and lowered operating expenses quickly to meet the revenue decline

The continuing recovery in global stock markets has yet to generate enough equity and corporate finance revenues to compensate for the decline in fixed income trading

• Fees in underwriting and advisory often deferred and thus don’t immediately translate into revenues

• Rising rates depressed the refinancing activity, reducing bond underwriting volumes


END OF THE BOND RALLY DEPRESSED BCG PERFORMANCE INDEX IN THIRD QUARTER 2003

BCG IB Performance IndexIndexed

59.962.758.6

44.642.648.651.4

56.956.1

80.171.469.8

108.2100

72.6

0

20

40

60

80

100

120

Q1/00 Q2/00 Q3/00 Q4/00 Q1/01 Q2/01 Q3/01 Q4/01 1Q/02 2Q/02 3Q/02 4Q/02 1Q/03 2Q/03 3Q/03

2000 2001 2002 2003

Note: BCG IB performance index is calculated based on profitweighted volume trends in M&A, ECM, Equity Sales & Trading and Bond Origination

Source: Dealogic; SDC; Autex; BCG analysis

: BCG IB performance index is calculated based on profitweighted volume trends in M&A, ECM, Equity Sales & Trading and Bond Origination

Source: Dealogic; SDC; Autex; BCG analysis

Note


BOND TRADING SURGE ENDED IN THIRD QUARTER 2003Recovery in Equities and Advisory Business

0

50

100

150

1Q01 3Q01 1Q02 3Q02 1Q03 3Q03

$BCorporate Bonds Origination

0

200

400

600

1Q01 3Q01 1Q02 3Q02 1Q03 3Q03

M&A Advisory(1)

$B

0

200

400

600

800

1000

1Q01 3Q01 1Q02 3Q02 1Q03 3Q03

$BUS Bond Trading(2)

0

2

4

6

8

10

1Q01 3Q01 1Q02 3Q02 1Q03 3Q03

Equity Trading

US

Asia

Europe

$tr

(1) Based on effective transactions(2) Daily average trading volumes for treasuries, agencies, ABS/MBS, corporate bondsSource: Dealogic; SDC; FIBV; Fed. Reserve Bank of New York; BCG analysis


INVESTMENT BANKING MARGINS IMPROVED DESPITE DECLINING REVENUES

Q3/2003 vs. Q2/2003

Q2/03

Q3/03

10%

20%

30%

40%

50%

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Revenues($B)Ø –12.8%

Ø+2

.4% LB

ML

GS

MS

JPMC

Citi

BS

Q3/03 Ø: 33.5%

Q2/03 Ø: 31.1%

DB

CSFB

UBS

Gross profitmargin (%)

Note: Ø calculated on a revenue weighted basis; Operating revenue for investment banking and institutional sales and trading; extraordinary charge-offs excludedSource: Company reports, BCG analysis


RESULTS SIGNIFICANTLY BETTER THAN A YEAR AGOQ3/2003 vs. Q3/2002

Q3/02

Q3/03

10%

20%

30%

40%

50%

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

LBML

GS

MS

JPMC

Citi

Ø+1

5.3%

BS

Q3/03 Ø: 33.5%

Q3/02Ø: 18.2%DB

UBS

CSFB

(-13.2%) (-14.3%)

Gross profitmargin (%)

Revenues($B)Ø +22.8%

Note: Ø calculated on a revenue weighted basis; Operating revenue for investment banking and institutional sales and trading; extraordinary charge-offs excluded Source: Company reports, BCG analysis


TRADING AND CORPORATE FINANCE REVENUES DECLINEDGoldman Sachs Has Highest Share Of Corporate Finance Revenues

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

0.5 1.0 1.5 2.0 2.5 3.0 3.5

Q2/03

Q3/03

10%

15%

20%

25%

30%

35%

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Corporate Finance Revenues Q3/03 vs. Q2/03

MSLB

Citi

GS

IBD rev as% of totalrevenuesQ3/03

GS

LB

Citi

MSML

JPMC

Revenues($B)

Revenues($B)Ø –17.9% Ø-9.8%

ML

BS BSØ: 77.7%

Ø: 23.0%

JPMC

CSFB

DB

UBS

DB

UBS

CSFB

Trading RevenuesQ3/03 vs. Q2/03

Tradingrev as% of totalrevenuesQ3/03

Note: Trading and corporate finance revenues don‘t add up to 100% because of ‘Other’ revenueSource: Company reports; BCG analysis


Market review:

Corporate finance


CORPORATE FINANCE BUSINESS SLOW DESPITE POSITIVE DEVELOPMENTS IN THE THIRD QUARTER 2003

Equity origination recorded the strongest quarterly volume since 2001• Global equity issuance jumped 60 percent from previous quarter• U.S. deal volume more than doubled in last three months

M&A activity in the U.S. improved strongly• Volume of announced deals increased by more than 30 percent from second quarter

However, these positive developments have so far failed to improve results in corporate finance• Fee payments for equity and m&a transactions are generally deferred• Decline in bond underwriting ate up gains from equity and advisory

Goldman Sachs continued to be the dominant investment bank in high margin equity underwriting and advisory businesses in third quarter of 2003

• Lazard has improved its position in global m&a under Wasserstein’s leadership

The integrated corporate and investment banks dominated the bond underwriting business• Morgan Stanley only bulge bracket firm in the top five underwriters, but still 50%

behind the market leader• Citigroup leads bond underwriting in the U.S. and Deutsche Bank in Europe


M&A and Equity Origination

EQUITY UNDERWRITING BOOMED IN ASIA AND THE U.S.Market Volumes


ECM Announced M&A deals

2840

1624 24

3017 15

22 22 20

26

36

15

3224

31

13 1510

17

42

15

9

13

10

11

13

158 7

10

17

0

20

40

60

80

100

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

$B

69

85

44

6659

74

Global

US

Asia

Europe

45

37 39

217 185110 109 108 138

96154 164

122 111

261

210305

245

106133

149103 69

95 124

61

64 42

46

33

5838 48

42 60 42

0

100

200

300

400

500

600

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

$B539

459 457

400

247

329283

306275

49277

79

277

Source: Dealogic; SDC; BCG analysis


M&A and Equity OriginationM&A and Equity Origination

CITIGROUP LOST SHARE IN U.S. BUT GAINED IN EUROPEAN ECM

0%

20%

40%

60%

80%

100%

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

Gained share

Lost share

ECM Europe

ABN

HSBC

GS

DB

CSFB

ML

MS

Citi

JPMCUBS

BNPCA Cazenove

Relative market-position 9M02

ING

DKWLB

CL SG

0%

20%

40%

60%

80%

100%

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

Gained share

Lost share

ECM US

GS

DB

CSFB

ML

MSCiti

JPMCLB

UBS

BS

BoA


Wachovia

Thomas Weisel

Relativemarket-position9M03


Note: Relative to market leaderSource: Dealogic; SDC; BCG analysis



GOLDMAN SACHS REMAINED THE GLOBAL LEADER IN M&AM&A and Equity Origination

0%

20%

40%

60%

80%

100%

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

Gained share

Lost share

M&A Europe

BNP

ABN

GS

DBCSFB

ML

MSCiti

JPMC

UBS

Lazard

CA


Greenhill

LBCL

HSBCDKWSG

Rothschild

0%

20%

40%

60%

80%

100%

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

Gained share

Lost share

M&A US

GS

DB

CSFB ML

MS

CitiLB

UBS

BSLazard


HSBC

BoARothschild

JPMC

DKW



Note: based on Date effective, relative to market leaderSource: Dealogic; SDC; BCG analysis


Fixed Income Origination

BOND ORIGINATION VOLUMES DECLINEDFixed Income Origination

Corporate BondsAll Bonds

Global

US

Asia

Europe

272 226 148 223 233 221 170 195332

471268

524 551

449523 568

493437 460

640

711

560

43 95

39

5543

6656

61

57

140

68

0

250

500

750

1000

1250

1500

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

$B

839 872

636

801844

780

663715

1029

79 7841 66 53 63

28 38 63 83 64

132 146

87

11693 90

4355

86

128

80

25 29

19

25

18 28

1822

22

28

18

0

100

200

300

400

500

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

$B

236253

147

207

164181

89115

172

1323

239

896

162

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



INTEGRATED CORPORATE AND INVESTMENT BANKS DOMINATED BOND UNDERWRITING


Corporate bonds Europe

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%Relative market-position 9M02

BNP

ABN

HSBCSG

CA

Barclays

Gained share

Lost share

DB

CSFB

ING

MS

Citi

DKW

JPMC

LB

UBS

BoA

GS

MLCoba

Corporate bonds US

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%Relative market-position 9M02

Gained share

Lost share

Barclays

GSDB

CSFB

ML

MS

Citi

JPMC

LB

UBSBS

WachoviaHSBC

BoA

SGBNP



Note: Relative to market leaderSource: Dealogic; SDC; BCG analysis


Market review:

Fixed income trading


FI TradingFI Trading

BOND TRADING VOLUMES STAGNATED AND REVENUES SUFFERED

Bond trading volume growth ended in third quarter 2003• Overall U.S. bond trading volumes slowed down• Average daily ABS/MBS and corporate bond trading volumes declined by eight and two

percent respectively from previous quarter

As expected, rising interest yields made trading gains difficult• 10-year U.S. Treasury yield increased by a full percentage point in three months period

ending in September• Aggregated fixed income trading revenues of the top ten investment banks declined by

22 percent from last quarter

Banks managed their fixed income risk exposure successfully in the last quarter• Combined value-at-risk of leading investment banks in interest rates, foreign exchange

and commodities declined by 18 percent from previous quarter• Goldman Sachs took highest risks in fixed income trading


FI Trading

FIXED INCOME TRADING RALLY SLOWED IN 3RD QUARTERABS/MBS Refinancing Activity Declined

FI Trading

US Daily Average Bond Trading Volumes Growth

364 426 430 428 474 477 457530 555

108132 133 137

166 188 206

230 211

99

97 104 120116 124 134

149 146

0

200

400

600

800

1000

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

$B

571

656 667 685756 789 797

909 911

Total

MBS/ABS

Corp. Bonds

Treas/Agencies

26% 26%

5%

16%17%

-8%

48%

27%

-2%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

3Q/03 vs. 2Q/03 3Q/03 vs. 3Q/02 9M03 vs. 9M02

+/-0%

20.5% 27.6%

Note: Daily average trading volumes, with Interdealer Brokers and othersSource: Fed. Reserve Bank of New York; BCG analysis


FI TradingFI Trading

TREASURY YIELDS ROSE OVER 100 BASIS POINTS IN THIRD QUARTER 2003

Directly Affecting Fixed Income Revenues

Fixed Income Trading Revenues By Quarter (Indexed)

0

25

50

75

100

125

150

Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03

(%)

10088

97

126

8075

124

2

3

4

5

6

Jan-02

Mar-02

Jun-02

Sep-02

Dec-02

Feb-03

May-03

Aug-03

Nov-03

(%)

+138

bp

Jan-02

Jun-02

U.S. Government Bond Yield

Note: 10-year U.S. Treasury bonds; aggregated revenues for top 10 investment banksSource: Bloomberg, S&P, company results


FI Trading

TOP TEN INVESTMENT BANKS MANAGED VALUE AT RISK SUCCESSFULLY IN THIRD QUARTER

FI Trading

Market Risk: Combined Value-at-Risk Risk Efficiency Q3/03

414 448 433 461588

494

83 88109

137

947962 55

91

74

71

378412

67 106795982

0

200

400

600

800

1000

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

563 577570543

593662

799$M

659

Total VAR

FX

Commodities

Interest rate

FixedIncomeTradRev$M

0

500

1,000

1,500

2,000

0 25 50 75 100

VAR$M

‘Broker’

‘Trader’

JPMC

MS

DBCiti

GS

UBS

CSFB

ML

LB

BS

Ø all players

Note: VAR at 99% confidence/1 day intervals for interest rate, currency,commodities price risk; differently reported VARs converted assuming normal distribution of risk positions

Source: Company reports, BCG analysis


Market review:

Equity trading


Equity TradingEquity Trading

SUMMARY EQUITY TRADING

Global stock markets continued their recovery in third quarter 2003• All major global equity indices rose in the three months ending September• Nikkei stock market index climbed 19 percent year to date

Increased trading volumes did not translate into revenue gains in third quarter 2003• While global volumes picked up 9 percent to USD 8.7 trillion, • Aggregated equity trading revenues of top ten investment banks declined by 9 percent• Low-margin program trades continued to gain market share at NYSE

Investment banks took increased equity trading risks to generate equity trading income• UBS, Deutsche Bank and Goldman Sachs took the highest market risk relative to their

equity trading revenues• Merrill Lynch and Lehman Brothers were the most “risk efficient” banks in equity trading

UBS continued to gain market share in European and U.S. equity trading and was the leading equity trading house in the third quarter measured by revenues


Equity trading

GLOBAL EQUITY PRICES CONTINUED TO RISEEquity trading

1%13%

19%5%

22%9%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

YTD 2003 Last 12M

Growth

0

20

40

60

80

100

120

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

Nikkei225 S&P500

FTSE E300

1Q02

S&P 500

Nikkei 225

FTSE E300

3Q01 3Q02 1Q031Q01 3Q03

Development of Main Equity Indices(1)

(1) Indexed Note: YTD 10/15/03Source: Thomson Financial Datastream


Equity tradingEquity trading

INCREASED EQUITY TRADING ACTIVITY DID NOT PRODUCE REVENUE GAINS IN THIRD QUARTER

Global

US

Asia

Europe

Equity Trading Revenue By Quarter (Indexed)

0

20

40

60

80

100

120

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

%100

76

54 55 52 5245

4247

5257

Global Exchange Trading Volumes

3.6 3.2 2.8 2.9 2.4 2.7 2.4 2.3 2.2 2.5 2.6

7.3

6.0

4.6 5.25.1 4.9

4.4 4.3 3.84.5 4.6

1.0

0.9

0.70.9

1.0 1.00.8 0.8

0.8

1.1 1.4

0

2

4

6

8

10

12

14

Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 4Q/02 1Q/03 2Q/03 3Q/03

$tr 11,9

10,1

8,28,9

8,4 8,67,6 7,4

6,8

8,08,7

Note: Single counted, includes investment funds traded at exchanges;aggregated trading revenues for top 10 investment banks

Source: FIBV; BCG analysis


Equity trading

REVENUE OPPORTUNITIES IN EQUITY TRADING INCREASINGLY RISKY

Equity trading

Equity Price Risk Risk Efficiency Q3/03

0

50

100

150

200

250

300

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03

195 204

227

191182 184

Value-at-risk$M

214230

TradRev$M

0

250

500

750

1,000

0 10 20 30 40 50VAR(1)

$M

‘Broker’

‘Trader’

GS

UBS

Citi

MS

CSFB

JPMC

DB

ML

LB

BS

Total

JPMC

MSDB

CitiGS

UBS

CSFB

ML

LB

BS

Ø all players

Note: VAR at 99% confidence/1 day intervals for equity price risk; differently reported VARs converted assuming normal distribution of risk positions

Source: Company reports, BCG analysis


Equity tradingEquity trading

SHARE OF PROGRAM TRADING AT NYSE CONTINUED GROWTH TREND

Program trading share NYSE 2003

0

10

20

30

40

50

60In week ofJun30, program trades involved more than 50% of NYSE

trading volume

Jan Feb Mar Apr May Jun Jul

% of alltrades

Aug Sep Oct

Note: 50% means that in 50% of trades there is a program trade involved on one side of the trade Source: NYSE


Equity trading

MERRILL MAINTAINED TOP POSITION IN THE U.S. BUT COMPETITORS CLOSED GAP

Equity trading

Institutional equity trading Europe

0%

20%

40%

60%

80%

100%

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

ABN

HSBC

Gained share

Lost share

GS

DB

CSFBML

MS

Citi

DKWJPMC

LB

UBS


Cazenove

SG

Coba

BoA

Institutional equity trading NYSE

0%

20%

40%

60%

80%

100%

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

BoA

Knight

Gained share

Lost share

GS

DB

CSFB

ML

MS

Citi

JPMC

LB

UBS

BS


Wachovia

ABN

SG



Note: ML includes HHG; GS includes SLK; DB includes NDB; ABN includes ING US;relative market positions are based on number of traded shares relative to market leader

Source: Autex; 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

European data comes from Dealogic; U.S. and Asian data from Thomson Financial Securities 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 non-convertible bonds including ABS, MBS, municipals, agency, and corporate bonds

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

Equity trading data reflects institutional block trades as advertised in Autex Blockdata

Goldman Sachs’, Lehman Brothers’, and Morgan Stanley’s 3rd quarter ended in August 31st , all others in September 30th, 2003

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