Strong Equity Market Activity In Q4 Boosts Underwriting Fees For Banks

by Trefis Team
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Global equity markets saw a marked turnaround from the extremely slow Q3 to record the strongest quarter in three years for Q4 2013, according to data compiled by Thomson Reuters. ((Global Equity Capital Markets Q4 2013, Thomson Reuters Deals Intelligence)) Companies across the globe raised $264.4 billion through IPOs and follow-on offerings in the last quarter – a good 82% higher than the $145.1 billion figure for the third quarter and the best since the bumper $350 billion proceeds seen in Q4 2010. Solid performance over the first half of the year helped equity underwriting deals worth just under $800 billion go through in 2013.

The trend witnessed in equity capital markets for the second half of the year is readily justified by the fact that corporate firms grew wary of raising fresh capital in the third quarter. That’s when the Fed’s initial announcements of a tapering plan cast a shadow of uncertainty over global markets. Once the markets stabilized in Q4, these firms went ahead with their equity offerings – boosting underwriting activity for the period.

A great quarter for the equity markets would obviously translate into higher equity underwriting fees for the investment banks. Thomson Reuters’ data estimates a 34% jump in equity underwriting fees for the industry as a whole compared to Q4 2012 and a 65% increase sequentially – making this one of the most profitable quarter for the banks’ equity underwriting desks in three years. In this article, we detail the equity capital market performance of the country’s five largest investment banks in Q4 and also estimate the change in each of their fee revenues compared to Q3.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The table below summarizes the performance of the equity underwriting unit at each of the five largest U.S. investment banks based on data released by Thomson Reuters last week. Notably, these banks occupied the top five spots in global rankings in terms of deal size – a recurring trend over the years.

Bank Deal Size Mkt. Share # Deals Avg. Deal Size Q4’13E Fees Q3’13 Fees
Goldman Sachs $31.4 B 11.9% 138 $227 M $573 M $276 M
Morgan Stanley $21.7 B 8.2% 145 $150 M $470 M $236 M
Bank of America $20.2 B 7.6% 126 $160 M $418 M $329 M
JPMorgan $18.8 B 7.1% 133 $141 M $434 M $333 M
Citigroup $15.0 B 5.7% 101 $149 M $313 M $174 M

Goldman Sachs reclaimed the top spot in terms of market share by deal size after being pushed to second place by JPMorgan in Q3. The bank topped the list of book-runners in the U.S., Europe as well as Asia to achieve a commanding 11.9% share for Q4. Goldman also has a substantially larger average deal size than any of its competitors - indicating that the bank played a role in most of the largest equity underwriting deals over the quarter.

With an 8.2% market share, Morgan Stanley came in second with a total deal size which was roughly 30% lower than Goldman. However, the investment bank had a role to play in more deals this quarter (145) than any other bank. This achievement went to JPMorgan more often than not over recent years, as the diversified banking group ranked #1 in this regard for 5 of the last 8 quarters.

Goldman’s role in a bulk of the equity deals for the quarter, including the biggest ones, also helped it amass more fee revenues than the other banks with imputed fees of well over half a billion dollars. That’s more than double the $276 million in equity underwriting fees the investment bank pocketed in Q3 (see Q3 2013 U.S. Investment Banking Round-Up: Equity Underwriting). The last time Goldman made more than $500 million in fees was in Q4 2010 ($555 million).

As can be seen from the table, all the banks are expected to earn at least 30% more fee revenues than they did in Q3. It should be noted here that imputed fees are merely an estimate based on historical data about banks’ fees for a particular role in the equity underwriting process, and the numbers the banks actually report would differ from these figures. But these numbers do give a good indication of what to expect. What remains to be seen is what numbers the banks actually come up once the earnings season gets underway next week.

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