Q4 2014 U.S. Investment Banking Round-Up: Equity Underwriting

Last month, we detailed the notable reduction in global equity underwriting activity over the last quarter of 2014 in comparison to the much stronger Q2 and Q3 performances as a part of our article Global Equity Market Activity At Seven-Year High In 2014 Despite Lukewarm Q4. Using Thomson Reuters’ quarterly investment banking league tables, we concluded that the country’s biggest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:MS) and Citigroup (NYSE:C) – fared worse than the industry as a whole in terms of equity underwriting fees for the period. While Thomson Reuters estimated a 2% reduction in equity underwriting fees for the industry, the largest banks were expected to report a higher reduction in fee revenues, as the total volume of equity deals shrunk 9% sequentially from $219 billion in Q3 to under $200 billion in Q4.

With the banks reporting their Q4 results over recent weeks, we now follow up with a side-by-side comparison of the actual equity underwriting fees these banks generated for the period.

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

The global equity markets saw companies across the globe raise just under $200 billion through IPOs and follow-on offerings in the last quarter of 2014 – 9% below the $219 billion figure for Q3 2014 and a good 24% lower than the $264 billion raised in Q4 2013. Fortunately, the exceptionally high level of activity seen in Q2 2014 ($282 billion) helped the volume of total equity underwriting deals exceed $890 billion for the year, making this the best year since 2007 in terms of global equity underwriting volumes.

The lower number and size of equity deals meant lower equity underwriting fees for investment banks worldwide. The table below was compiled based on the banks’ earnings announcements, and shows how much in equity underwriting fees the five banks earned for each of the last five quarters as well as the last two years.

The first thing that stands out here is the marked reduction in year-on-year fees for each of the banks. Goldman saw the sharpest decline year-on-year of a little more than 45%. It should be noted that Goldman’s Q4 2013 figure was the highest for any investment bank in any quarter over the last four years. Declines for the other banks ranged from 11% (Citigroup) to 25% (JPMorgan). Notably, Goldman Sachs, Morgan Stanley and Bank of America made roughly the same amount of equity underwriting fees in Q4 2014.

Bank of America was the only bank that saw a sequential improvement in these revenues – something we had highlighted in our earlier article. This is because the diversified banking group posted an exceptionally low equity underwriting fee figure for Q3 2014, and ended up gaining 10% in Q4. The quarter-on-quarter declines for the other banks were in the range of 15-25%. Taken together, these five banks reported a 16% reduction in revenues for Q4 2014 compared to Q3 2014 – double the 8% fall we estimated in our previous article and far worse than the industry-wide figure of 2% provided by Thomson Reuters.

Figures for the full year tell a completely different story, as all banks posted an improvement in these revenues compared to full-year 2013. It should be noted that Goldman Sachs’ full-year 2014 equity underwriting fee figure of $1.75 billion was the highest by any bank for a year in the last five years. The record for the highest-ever annual figure by an investment bank is held by JPMorgan, which churned out $2.64 billion in the wake of the economic downturn for the year 2009. However, Goldman Sachs and Morgan Stanley have surged ahead of the country’s largest banking group in the global equity market arena over recent quarters.

As equity markets generally see the highest activity level in the first quarter of the year, we expect these fee revenues to see a notable increase for the current quarter.

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