Q4 2014 U.S. Investment Bank Round-Up: Advisory Services

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2014 was the best year for M&A deals worldwide since 2007 thanks to a marked increase in activity over the last two quarters. Data compiled by Thomson Reuters showed that deals worth almost $3.5 trillion were announced over the year, while deals valued at a total of $2.5 billion were closed. [1] The discrepancy between the two figures stems from the fact that some of the largest deals announced in 2014 were yet to close by the end of the year. However, with the size of completed deals swelling quarter-on-quarter, Thomson Reuters estimated an 8% sequential jump in advisory revenues for the industry as a whole.

Last month, we detailed our expectations for Q4 advisory revenues at each of the country’s five largest investment banks – JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch(NYSE:BAC) and Citigroup (NYSE:C) – as a part of our article Strong Q4 Activity Makes 2014 The Best Year For M&A Since Downturn. Now that these banks have reported their results for the fourth quarter and full-year 2014, we take a look at how they fared with respect to each other in terms of actual advisory fees.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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The total size of M&A deals completed in the fourth quarter of the year was $817 billion – the highest in at least four years. In comparison, the volume of total deals closed in Q3 2014 and Q4 2013 were $618 billion and $586 billion, respectively. U.S. banks garnered a strong share of the total figure, with Morgan Stanley, Citigroup, Goldman Sachs and JPMorgan occupying the top four spots in the rankings, and Bank of America coming in at the #6 position after U.K.-based Barclays (NYSE:BCS).

The surge in the total size of completed deals meant that advisory revenues for the period also received a boost – something that can be seen clearly in the advisory revenues for the five largest U.S. investment banks. The table below was compiled based on the banks’ earnings announcements, and shows how much in advisory fees each of the five banks earned over the last five quarters as well as the last two years.

(in $ mil) Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 FY’13 FY’14
Goldman Sachs 585 682 506 594 692 1,978 2,474
Morgan Stanley 451 336 418 392 488 1,310 1,634
JPMorgan 434 383 397 413 434 1,315 1,627
Bank of America 356 286 264 316 341 1,131 1,207
Citigroup 266 175 193 318 263 852 949
Total 2,092 1,862 1,778 2,033 2,218 6,586 7,891

Goldman remains the undisputed leader in the global M&A arena – bagging the top spot in terms of fees generated for the fifteenth consecutive quarter. In fact, the investment bank has lost the top spot in only 5 quarters over the last ten years. Goldman has also churned out at least half a billion dollars in advisory fees every quarter over the last four years with only two exceptions (Q1 2011 and Q3 2013). Goldman routinely pockets between 30-40% more  in quarterly advisory fees compared to its nearest competitor. Notably, the $692 million in advisory fees for Q4 2014 were the highest for the bank since the economic downturn of 2008. The strong position that Goldman enjoys in the industry is the reason that we expect its advisory revenues to continue to grow in the future, as shown in the chart below.

Morgan Stanley came in at the second position with just under half a billion dollars in advisory fees. The bank’s performance for the quarter were boosted by its role in the $19.5-billion acquisition of WhatsApp by Facebook, which closed last October. The deal was also responsible in leap-frogging Morgan Stanley to the top of the list of global investment banks in terms of market share for Q4 2014 – overthrowing Goldman, which has held the #1 position for 10 of the last 16 quarters.

Notably, Citigroup was the only bank among those detailed here to witness a reduction in advisory revenues both year-on-year as well as quarter-on-quarter. The reason for this is most likely the fact that the globally diversified banking group helped close a lower number of deals (66) compared to its peers. The fact that Citigroup grabbed a market share larger than Goldman’s (primarily thanks to its part in the Kinder Morgan mega-deal) did not reflect in the actual fees earned by the bank.

Taken together, these five banks witnessed a sequential 9% increase in advisory revenues sequentially – indicating that they fared better than the industry as a whole, which saw an 8% increase in these revenues. While Morgan Stanley and Goldman Sachs reported double-digit growth, Bank of America’s gains were in line with the industry. With the first quarter of the year normally seeing the highest level of M&A activity in a year, the revenues for the current quarter should also receive a boost from the completion of some of the large deals announced over the second half of 2014.

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Notes:
  1. Global M&A Financial Advisory Q4 2014, Thomson Reuters Deals Intelligence []