Q2 2014 U.S. Investment Banking Round-Up: Equity Underwriting

The second quarter of 2014 was a particularly strong period for the global equity capital markets, with companies around the world raising $282 billion in fresh capital through IPOs and follow-on offerings – making it the best quarter in this regard since Q4 2010. ((Global Equity Capital Markets Q2 2014, Thomson Reuters Deals Intelligence)) The high activity level indicated healthy improvements in equity underwriting fees for investment banks. We detailed this in our article Elevated Equity Capital Market Activity To Boost Q2 Underwriting Fees For Banks last month, with the industry expected to report a 38% hike in these revenues in Q2 compared to Q1. More importantly, the country’s five biggest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:MS) and Citigroup (NYSE:C) – were expected to fare better than the industry at large ,with a 45% jump in equity underwriting revenues.

In this follow-up article, we compare the actual revenues generated by the equity underwriting desks at each of these banks in Q2 2014 while also describing the trend seen in these revenues over the last few quarters.

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

The global equity markets demonstrated a marked turnaround in Q2 2014 after a rather soft performance in the first quarter. Equity deal volumes of $282 billion for the period represented a 50% improvement quarter-on-quarter and a 40% growth year-on-year. Naturally, the strong market conditions were expected to translate into a similar revenue growth for the banks.

The table below was compiled based on the banks’ earnings announcements, and shows how much in equity underwriting fees each of the five banks earned for each of the last six quarters.

The first thing that stands out here is the actual growth in fee revenues for these five banks, as the total figure of $2.4 billion in Q2 2014 is 41% higher than $1.7 billion in Q1 2014 and 36% more than that for Q2 2013. This would indicate that the biggest investment banks performed slightly better than the industry as a whole for the period.

The equity underwriting business has seen some fierce competition among these banks over recent years, with Bank of America ranking #1 in terms of fees for six of the last 14 quarters, followed by Goldman Sachs (five out of 14) and JPMorgan (three out of 14). Goldman emerged at the top of the list for the third consecutive quarter, with the bank making around $545 million in equity underwriting fees. The strong performance can be largely attributed to the fact the bank had the largest share of the equity market in terms of deal size for each of the last three quarters. The diversified banking group, Bank of America, came in a close second with $514 million in revenues – a 64% jump compared to the previous quarter.

Interestingly, Morgan Stanley came in at the third position this quarter despite ranking fifth among these banks in terms of total deal size. This would indicate that the bank likely played primary roles in many of its equity offerings over the period – allowing it to pocket larger fees. At the same time, Citigroup’s efforts to make it to the second position among global investment banks in terms of total deal size did not translate into a similar improvement in terms of revenues, as the globally diversified bank ended up with the lowest fee revenues among these banks. The fact that Citigroup participated in fewer deals in Q2 (115) than the other banks appears to be the primary reason for the lower revenues.

Each of the banks clearly benefited from the improving equity capital market conditions, though, as they reported sequential revenue improvements between 25% and 64%. Notably, all the banks except for JPMorgan saw a year-on-year increase in these revenues of at least 45%. JPMorgan’s equity underwriting revenues increased just over 4% compared to Q2 2013, as a result of its exceptionally strong performance in the year-ago period.

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