Investment bank results are notoriously difficult to predict. One bank analyst comments: “The sales force dealing with investment banks relies on market gossip as much as they do on output from the analysts in a way they would not need to in other sectors.”
For all the fuss there has been about how investment banks operate – in creating risky structures and in failing to separate research for investors from corporate finance work – and about the need for transparency, the fact remains that they are highly secretive about how they earn profits.
Little is revealed about which products are making money, the type of client, whether the earnings are primary or secondary, whether the earnings are proprietary or client driven.
Fear of giving away secrets to competitors is the banks’ excuse and as they are not forced to reveal more, why would they? Regulators may get to see a more detailed breakdown but certainly investors have little to go on when making buy or sell decisions. Surely it is time things improved.
Beyond volume league tables
For a long time, the league tables of deals by volume have been the benchmark of investment banking performance but clearly these tell little of how much a bank earns from the deals. Banks are accused of playing the league tables by doing unprofitable deals to gain position.
This month, The Banker has put together data from several sources that show how banks perform when their underwriting performance is measured in terms of revenue generated rather than volume. Data provider Dealogic uses an in-house model that calculates the different amounts that banks earn from deals according to their place in the syndicate and the likely level of fees where these are not disclosed. These revenues are broken down by equity capital markets, debt capital markets, M&A and syndicated loans as well as by geography. They throw up some interesting findings.
JPMorgan tops the global IB revenue ranking in first half 2005 with net revenue of $2121m and a market share of 7.2% (table 1). Historical tables (3-6 see below) going back to 2001 show that Citigroup has held this first half position for the past four years.
Table 1 also shows the big schism between the first tier investment banks and the second tier, with Lehman Brothers holding 10th position on revenues of $1097m followed by a large drop to $651m, the revenue of Barclays Capital in 11th place. The product breakdown clearly illustrates Barclays’ debt model with a full 99% of revenue coming from DCM and loans and only 1% from ECM and 0% from M&A. Banc of America has a similar model with 77% of revenues coming from DCM and loans.
Breaking the figures down by geography (tables 7 and 8) shows how well leading European banks such as UBS and Deutsche are now doing in the Americas, with UBS earning 49% of revenues there compared with 38% in Europe, Deutsche makes 44% there against 47% in Europe.
The global fixed income revenue and volume rankings (tables 9 and 10) show how profitable the high yield business is compared with investment grade. By total market volume, investment grade accounted for 41% of the market whereas high yield was only 12% but in revenue terms investment grade earned only 21% against 42% for high yield.
Dealogic has also produced figures showing total IB revenue as a percentage of total bank revenue for individual banks. Even for dedicated investment banks, such as Goldman Sachs, Morgan Stanley and Lehman Brothers, this figure is only between 11% and 16%. For universal banks such as Citigroup and Banc of America the figureis about 4% to 5%.
Another view of the market
That is an awful lot of other revenue. Keefe, Bruyette & Woods (KBW), a brokerage that specialises in the financial sector, has kindly allowed us to publish table 17, based on equity market information showing investment bank revenues broken down by origination and sales and trading.
These origination figures are quite different from Dealogic’s, which are based on a formula. The banks themselves account for a deal’s earning in different ways and these market figures are the ones KBW uses. A bank could, for example, allocate 30% of revenues on an underwriting deal to sales and trading. Once again, it shows how opaque the market is.
The KBW tables show that total origination and advisory revenues of nearly $7bn in first half 2005 were about 13% of total sales and trading revenues of $52.3 bn. Analysts complain that vast areas of activity that takes place in secondary markets is hidden from them especially in newer products such as collateralised debt obligations.
Mercer Oliver Wyman has put together graph 18 showing a breakdown by product across the entire sector but still the question must be raised of why so little information is widely available about investment bank earnings? With banks playing such a crucial role in the global economy, there can be little justification for their being so secretive.
Thanks to Dealogic, KBW and Mercer for helping to shed some light on the situation.
1. Global IB Revenue Ranking: First Half 2005
2. Global IB Revenue Ranking: First Half 2005 (percentage break-down)
3. Global IB Revenue Ranking: First Half 2004
4. Global IB Revenue Ranking: First Half 2003
5. Global IB Revenue Ranking: First Half 2002
6. Global IB Revenue Ranking: First Half 2001
7. Global IB Revenue Ranking by region: First Half 2005
8. Global IB Revenue Ranking by region: First Half 2005 (percentage break down)
9. Global Fixed Income Revenue & Volume Rankings: First Half 2005 – Product Sub-Type Breakdown
11. Global ECM Revenue & Volume Rankings: First Half 2005 - Product Sub-Type Breakdown
13. Global M&A Revenue Rankings: First Half 2005
14. Global ECM Revenue Rankings: First Half 2005
15. Global DCM Revenue Rankings: First Half 2005
16. Global Loan Revenue Rankings: First Half 2005
17-1. IB Revenue Trends and Gearing
