Q2 2015 U.S. Investment Bank Round-Up: Debt Origination

Global debt capital markets slipped over the second quarter after starting the year on a strong note, as companies worldwide chose to delay plans to raise debt capital in view of growing uncertainty over interest rates. Investment banks helped companies originate debt worth $1.4 trillion in Q2 2015 – which we detailed in our article Weak Debt Market Activity In Q2 Likely To Hit Origination Fees At Banks last month. The lower level of activity meant lower fee revenues for investment banks, and Thomson Reuters estimated a 15% reduction in fees for the industry as a whole in Q2 compared to Q1.

Now that the banks are done reporting their Q2 results, we follow up with a side-by-side comparison of the actual debt origination fees pocketed by the country’s five largest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:MS) and Citigroup (NYSE:C).

See the full Trefis analysis for Goldman Sachs | JPMorgan | Morgan Stanley | Bank of America | Citigroup

The global debt capital markets shrank to just over $1.4 trillion over Q2 2015 from $1.58 trillion for the previous quarter. This represents a 12% reduction in deal volumes quarter-on-quarter, and was expected to adversely impact the fee revenues generated by the investment banking industry for the period. However, the number of debt origination deals increased from 3,748 in the first quarter to 3,888 in the second quarter. This, coupled with the fact that U.S. investment-grade corporate debt swelled to a record high in Q2 2015, led us to conclude in our previous article that the U.S. investment banks were likely to outperform their peers around the globe.

The table below was compiled based on the banks’ earnings announcements and shows the debt origination fees that the five banks earned over the last six quarters.

JPMorgan retained the top spot in terms of debt origination fees for a third consecutive quarter in Q2 2015, with revenues in excess of $900 million for the period. Bank of America came in at a close second with just under $890 million in revenues. Notably, these two banks have held the top two spots among all global investment banks nearly every single quarter since the economic downturn of 2008 – highlighting their strong grip in the industry. Both of these financial giants gained substantial market share from their respective high-profile acquisitions during the downturn, with JPMorgan acquiring Bear Stearns and Bank of America merging with Merrill Lynch. And they did well to leverage their standing in the industry to benefit from the uptick in U.S. corporate bond activity this time around. Morgan Stanley’s strong results for the quarter also made it one of the best quarters for the bank in global debt capital markets since the downturn.

Interestingly, each of the U.S. investment banking giants reported a strong increase in debt origination revenues quarter-on-quarter, with gains ranging from 9% (Citigroup) to a whopping 47% (Goldman Sachs). Total quarterly debt capital market fees for these five banks jumped from $3.1 billion in Q1 2015 to $3.7 billion – an increase of 19%. The sum was also 6% higher than what it was for the year-ago period. This means that debt origination fees at the country’s largest investment banks stands in sharp contrast to the trend of a sequential 15% reduction in fees for the overall industry.

The chart below provides a snapshot of quarterly debt origination fees for each of these five banks since early 2005, and makes it easy to identify trends in these revenues over the last decade. You would notice that Citigroup reported a negative debt origination figure for four quarters in 2007-2008, with the figure falling to -$2 billion in Q1 2008. This was a result of huge write-downs on several highly leveraged finance commitments.

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