Q3 2015 U.S. Investment Bank Round-Up: Advisory Services

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The strong run witnessed by the global M&A industry over the first half of the year continued into the third quarter, with deals worth $867 billion being completed over the period. ((Global M&A Financial Advisory Q3 2015, Thomson Reuters Deals Intelligence)) This made Q3 2015 the best quarter since the economic downturn in terms of volume of deals completed, in turn boosting advisory fee revenues for investment banks around the world. Last month, we detailed our expectations for Q3 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). With these banks reporting their third quarter results over recent weeks, 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

The global M&A industry has seen an exceptionally high level of activity over the first three quarters of 2015, as an increase in the number of large-sized acquisitions resulted in deals worth $3.2 trillion being announced and $2.4 trillion being completed for the nine-month period. The difference between the two figures can be explained by the fact that there is a considerable delay between the time a deal is first announced to when it is actually closed. The strong pipeline of deals built over the first half of the year resulted in deals worth $867 billion closing in the third quarter – the highest in nearly eight years. Needless to say, strong gains in advisory fees accompanied the elevated level of activity.

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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 seven quarters.

(in $ mil) Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15 Q3’15
Goldman Sachs 682 506 594 692 961 821 809
JPMorgan 383 397 413 434 542 466 503
Morgan Stanley 336 418 392 488 471 423 557
Bank of America 286 264 316 341 428 276 391
Citigroup 175 193 318 263 298 258 243
Total 1,862 1,778 2,033 2,218 2,700 2,244 2,503

Goldman remains the undisputed leader in the global M&A arena – bagging the top spot in terms of fees generated for the eighteenth consecutive quarter. In fact, the investment bank has lost the top spot in only 5 quarters since early 2005. Also, Goldman reported average advisory fees of $860 million over the first three quarters – substantially higher than the average figure of $516 million for the 2009-2014 period. Goldman routinely pockets between 30-40% more  in quarterly advisory fees compared to its nearest competitor, and the gap has exceeded 60% for each quarter this year. 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.

Taken together, these five banks witnessed a sequential 12% increase in advisory revenues for the quarter. Bank of America’s revenues increased the most at 42%, followed by a 32% jump in revenues for Morgan Stanley. It should be noted, however, that Bank of America reported an exceptionally weak revenue figure in the previous quarter. While Goldman saw a marginal reduction in advisory fees compared to Q2 2015, Citigroup stands out as the only bank to report a year-on-year reduction in these revenues. Given the fact that 11 of the 15 largest deals that were announced over the first nine months of 2015 have yet to close, we expect fee revenues for these banking giants to remain elevated for at least two more quarters.

The chart below provides a snapshot of quarterly advisory fees for each of these five banks since early 2005, and makes it easy to identify trends in these revenues over the last decade.

M&AFees_15Q3

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