Q1 2014 U.S. Investment Bank Round-Up: Advisory Services

Last month, we detailed the extent to which reduced M&A activity for the first quarter of the year is expected to hit advisory revenues for the country’s largest investment banks as a part of our article Advisory Fees Likely To Take A Hit As Global M&A Activity Falls In Q1 2014. Our analysis was based on the quarterly M&A league tables released by Thomson Reuters in the first week of April, which predicted a 24% reduction in advisory fees for the industry as a whole in Q1 2014 compared to Q4 2013. ^[1] The sharp decline in fees was hardly a surprise given that Q1 was the slowest quarter in at least four years in terms of number of deals completed.

In this follow-up article, we look at how the country’s five dominant investment banks – JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – fared in terms of actual advisory fees earned.

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

After a poor showing in the first nine months of 2013, the global M&A industry witnessed a reversal of fortunes in the fourth quarter, with global investment banks completing M&A deals worth a total of $586 billion for the period. But M&A activity dipped again in Q1 2014 with global M&A deal size falling 8% to $540 billion. Q1 2014 was the slowest quarter in terms of number of deals announced worldwide for the first quarter of a year since 2004, and was also the slowest quarter in at least four years in terms of number of deals completed.

The negative impact of this trend on advisory fees for banks was readily apparent, with the fees down 24% for the period compared to the much better Q4 2013. Notably, advisory revenues for the five largest U.S. investment banks fell 11% quarter-on-quarter, indicating that the market leaders fared much better than the industry at large. The table below was compiled based on the banks’ earnings announcements, and shows how much in advisory fees each of the five banks earned for over the last five quarters.

Goldman remains the undisputed leader in the global M&A arena – bagging the top spot in terms of fees for the 12th consecutive quarter. In fact, the investment bank bucked the trend of declining M&A revenues for Q1 by posting a 17% sequential jump in these figures, and has churned out half a billion dollars in advisory fees on average each quarter since Q1 2011. Goldman routinely pockets between 30-40% more  in quarterly advisory fees compared to its nearest competitor, with this difference shooting up to 78% this time around. The bank has topped the M&A standings in terms of market share as well as deals participated in for nine of the last 12 quarters. We expect Goldman to maintain its strong position in the industry over the years to come – something that is clearly shown in the chart below.

JPMorgan came in a distant second in terms of advisory fees despite garnering a strong share of the market in terms of deal size (39.3% vs 42.0% for Goldman). This indicates that Goldman likely landed the most prominent roles in the biggest M&A deals that completed over the quarter, allowing it to stake its claim to a larger proportion of the fees. While the diversified banking group saw M&A revenues decline 12% quarter-on-quarter, third-placed Morgan Stanley saw these revenues dip 26% over the same period. Bank of America suffered a 20% reduction in revenues whereas Citigroup, which had a particularly bad quarter, saw its already low advisory revenues dip a further 34%. It should be noted that most deals employ more than one bank, so the market share figures are not exclusive (and will add up to more than 100%).

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1. Global M&A Financial Advisory Q1 2014, Thomson Reuters Deals Intelligence [↩]