Q4 2013 U.S. Investment Bank Round-Up: Advisory Services

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The last quarter of 2013 witnessed a notable improvement in global M&A activity compared to the previous quarters, which was expected to boost advisory fee revenues at each of the country’s five largest investment banks – something we detailed in our article M&A Activity Was Depressed In 2013 Despite Healthy Q4 Figures earlier this month. Our estimates were based on data compiled by Thomson Reuters about M&A deals completed over the period, which showed a 29% improvement in advisory fees for the industry as a whole in Q4 2013 compared to Q3. The Q4 boost in activity wasn’t enough to make-up for the poor performance over the first three quarters of 2013 though, making last year one of the slowest in terms of M&A activity and fees since 2010.

Now that the banks – JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley(NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) - have reported their results for the fourth quarter, 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 trend of slowing M&A activity seen over the first nine months of 2013 reversed in the fourth quarter, with global investment banks completing M&A deals worth a total of $586 billion in Q4 2013 – a strong 29% improvement compared to Q3 2013, but 12% below the Q4 2012 tally of $667 billion. The year 2013 saw the lowest number of deals being announced (36,800) and completed (27,194) since 2005

Fortunately, the strong Q4 performance helped boost fee revenue for the quarter considerably, with the industry making almost 29% more for the period compared to the much slower Q3. Notably, the five largest U.S. investment banks reported growth of between 35% and 64% in their advisory fee revenues for Q4 compared to Q3. In other words, the market leaders outperformed the industry, pocketing much larger fees than their smaller competitors.

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 as well as the last three years.

(in $ mil) Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 FY’11 FY’12 FY’13
Goldman Sachs 508 484 486 423 585 1,987 1,975 1,978
JPMorgan 465 255 304 322 434 1,792 1,491 1,315
Morgan Stanley 454 251 333 275 451 1,737 1,369 1,310
Bank of America 301 257 262 256 356 1,248 1,066 1,131
Citigroup 206 204 215 167 266 684 715 852
Total 1,934 1,451 1,600 1,443 2,092 7,448 6,616 6,586

Goldman remains the undisputed leader in the global M&A arena – bagging the top spot in terms of fees generated for the eleventh consecutive quarter. The investment bank has churned out roughly half a billion dollars in advisory fees every quarter over the last three 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.

Goldman’s tight grip on the industry becomes quite clear from the fact that it has topped the list of M&A advisers in terms of market share as well as deals participated in for 7 straight quarters. This 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.

JPMorgan and Morgan Stanley earned similar fees for the quarter despite the fact that Morgan Stanley had a much smaller market share (15.3%) for the period compared to JPMorgan (19.3%). This implies that Morgan Stanley had larger roles in the deals it was a part of, which allowed it to generate more revenues per deal. For the full year, the two banks made near-identical fees, with both of them garnering a 25% share of the market. 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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