Weak Debt Market Activity In Q2 Likely To Hit Origination Fees At Banks

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Global debt capital markets remained depressed for yet another quarter, with companies around the globe raising just over $1.4 trillion through debt issuance over the second quarter of 2015 according to Thomson Reuters’ quarterly report for the industry. [1] This figure is about 12% below the $1.58 trillion figure for Q2 2014 as well as Q1 2015. Notably, this is the fourth consecutive quarter for which debt origination volumes have shrunk year-on-year, with Q4 2014 also being the slowest period for the industry in at least three years. The industry witnessed its worst second quarter performance in five years. The number of debt origination deals increased slightly in this quarter, though, compared to the previous quarter.

As the debt origination fees that a bank reports are affected by the number of deals it participates in, the size of each deal and the actual role the bank plays in it, Q2 2015 is expected to be a bad period for banks in terms of fee revenues. Thomson Reuters’ data estimates a 15% decrease in fees for the industry as a whole compared to the previous quarter.

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JPMorgan (NYSE:JPM) continues to maintain a tight grip on the debt market, with the bank helping companies raise more money through debt originations than any of its competitors. Barclays (NYSE:BCS), Citigroup (NYSE:C), Bank of America-Merrill Lynch (NYSE:BAC) and Morgan Stanley (NYSE:MS) are the other investment banks which feature in the list of top five debt originators for the quarter.

The table below summarizes the performance of the debt origination units at each of these banks based on data compiled by Thomson Reuters. It should be noted that the fees for Q2 2014 and Q1 2015 mentioned here are imputed fees, and not the actual figures reported by the bank.

Bank Rank Proceeds Mkt. Share # Deals Avg. Deal Size Q2’15 Fees Q1’15 Fees Q2’14 Fees
JPMorgan 1 $111.5 B 8.0% 366 $305 M $556 M $507 M $533 M
Bank of America 2 $89.3 B 6.4% 335 $267 M $430 M $396 M $373 M
Citigroup 3 $84.7 B 6.0% 324 $261 M $326 M $452 M $444 M
Morgan Stanley 4 $79.4 B 5.7% 338 $235 M $375 M  $385 M $425 M
Barclays 5 $78.3 B 5.6% 295 $265 M $345 M $345 M $392 M

JPMorgan has maintained the top spot among all debt originators for fourteen straight quarters now. The bank also ranked at the top in terms of number of deals as it participated in 366 of 3,888 deals for Q2 2015. This represents a share of 9.4% of the market – a sequential reduction from 11.6% in Q1 2015. It should be noted that large debt origination deals normally have more than one bank working on them. Accordingly, the market share in terms of deal volume, as well as the number of deals, are not mutually exclusive.

Bank of America and Citigroup took up the second and third spot with a market share of 6.4% and 6% respectively. Morgan Stanley made it to the #4 spot in Q2 from its #6 position at the end of Q1 – removing Deutsche Bank from the list of top five debt originators for the quarter. Barclays also fell from the second spot to the fifth place as its market share fell from 6.9% to 5.6% quarter-on-quarter.

The average deal size among these banks decreased from $276 million in Q1 2015 to $267 million, with JPMorgan reporting the highest figure of $305 million among these five banks. However, Goldman Sachs fared better than any other bank in this regard, with an average deal size of $328 million for Q2 2015. Notably, Goldman has reported the highest average deal size for six consecutive quarters now. This can be attributed to the fact that Goldman is picky about the debt origination deals it is involved in, and is usually a part of only the largest deals that go through over a given period.

As far as revenue from these debt offerings is concerned, JPMorgan emerges on top in that category too, with imputed fees in excess of half a billion dollar yet again this quarter. The $556-million figure for Q2 2015 is 4% higher than the figure for the same quarter last year, and an improvement of 10% quarter-on-quarter. Bank of America is the only other bank that is expected to report an increase in revenues, while all the other banks should end up with Q2 2015 revenues that are lower than the figures for Q1 2015 as well as Q2 2014. Citigroup is likely to see the largest decrease in debt origination fees among these banks, with a reduction of around 25%. Note that imputed fees are merely an estimate based on historical data about fees demanded by the banks for a particular role in the debt origination 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.

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Notes:
  1. Global Debt Capital Markets Q2 2015, Thomson Reuters Deals Intelligence []