Dismal Equity Capital Market Activity Levels In Q3 Hurt Bank Underwriting Fees
The turmoil in global equity markets over the third quarter of the year had a palpable impact on the equity underwriting activity seen over the period. Weak global economic cues triggered sharp sell-offs across stock exchanges worldwide, which in turn forced many companies to put off plans they had to raise money through stock issuances. Quarterly data compiled by Thomson Reuters showing that companies around the world raised just $141 billion through IPOs and follow-on offerings in Q3 2015. [1] This compares to a figure of $279 billion in Q2 2015 and $219 billion in Q3 2014, and makes Q3 2015 the worst quarter in this regard since Q2 2012. With fewer equity underwriting deals to work on, the investment banks will be taking a sizable cut in their fee revenues this time around.
The significant quarter-on-quarter decline in total deal size was due to a marked reduction in the total number of equity underwriting deals. The total number of deals (918) was 23% lower than that in Q3 2014 (1,191) and a good 38% below that in Q2 2015 (1,485). As the equity underwriting fees earned by investment banks depends on the total size as well as the total number of deals completed over a period, there will a direct impact of this slowdown on these revenues. Thomson Reuters’ data estimates that equity underwriting fees for the industry as a whole this quarter was roughly 60% lower than what was seen for the previous quarter. In this article, we detail the equity capital market performance of the country’s five largest investment banks in Q3 2015, and also estimate the change in each of their fee revenues compared to Q3 2014 and Q2 2015.
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The table below summarizes the performance of the equity underwriting units at each of the five largest U.S. investment banks based on data released by Thomson Reuters earlier this week.
| Bank | Deal Size | Mkt. Share | # Deals | Avg. Deal Size | Q3’15 Fees | Q2’15 Fees | Q3’14 Fees |
| Morgan Stanley | $12.0 B | 8.5% | 56 | $214 M | $235 M | $460 M | $439 M |
| Goldman Sachs | $11.1 B | 7.9% | 56 | $199 M | $169 M | $575 M | $375 M |
| JPMorgan | $8.5 B | 6.0% | 55 | $154 M | $244 M | $423 M | $401 M |
| Citigroup | $7.0 B | 5.0% | 47 | $149 M | $137 M | $309 M | $256 M |
| Bank of America | $4.7 B | 3.3% | 42 | $111 M | $113 M | $357 M | $224 M |
Morgan Stanley trumped Goldman Sachs in the third quarter to garner the top spot among U.S. investment banks in terms of market share by deal size. Swiss banking giant UBS (NYSE:UBS) actually ranked #1 globally for the third quarter with a role in deals worth $12.2 billion – representing a market share of 8.7%. This is primarily due to UBS’s strong performance in equity deals for the EMEA region. In terms of number of deals participated in, though, Goldman Sachs and Morgan Stanley jointly came in first with a role in 56 deals.
With a 6% market share, JPMorgan slid to the third position from second in the previous quarter. In terms of market share, Q3 2015 was the worst quarter for the country’s largest bank since Q3 2011. Things were also particularly bad for Bank of America, which saw its market share drop to just 3.3% with a role in deals worth less than $5 billion – the lowest since the economic downturn of 2008. Before we detail the trends in imputed fees as shown in the table above, it should be noted 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 will likely differ from these figures. But these numbers do give a good indication of what to expect.
In terms of equity underwriting fees, JPMorgan appears to have pocketed more revenues than any other investment bank. While the diversified banking giant is expected to report around $250 million in these fees for Q3 2015, this figure is roughly half of what it made in Q2 2015 and Q3 2014. Morgan Stanley is also likely to have earned roughly the same amount in equity underwriting fees.
But the thing that stands out here is how drastic the reduction in fees is for each of the banks quarter-on-quarter. Goldman will be taking the largest hit, as these revenues have shrunk to less than one-third of the exceptionally strong $575 million figure for the previous quarter. Fee revenues for each of these banks will be at least 40% below what they earned in Q3 2014 as well as Q2 2015. Taken together, the five banks are expected to make less than $900 million in equity underwriting fees for Q3 2015 – 58% lower than the figure for the previous quarter and a 47% reduction year-on-year. This implies that the largest U.S. banks fared just as badly as the overall industry, as Thomson Reuters estimated a 60% sequential reduction in these revenues at the industry level.
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- Global Equity Capital Markets Q3 2015, Thomson Reuters Deals Intelligence [↩]