Depressed Global Debt Markets Indicate Poor Q3 Origination Fees At Banks

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The poor run for global debt capital markets continued for another quarter as companies around the globe raised just $1.23 trillion through debt issuance over Q3 2015 according to Thomson Reuters’ quarterly report for the industry. [1] This figure is about 7% below the $1.32 trillion figure for Q3 2014 and 12% lower than the $1.4 trillion raised in Q2 2015. The decline over Q3 marks the fifth consecutive quarter for which debt origination volumes have shrunk year-on-year, with total debt origination volumes falling to the lowest level since Q2 2012 – something that will have a negative impact on debt origination fees for global investment banks.

The number of debt origination deals (3,531) was also notably lower than that for the previous quarter (3,888) as well as the year-ago period (3.766). 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, Q3 2015 will be another bad period for banks in terms of fee revenues. The combined effect of the lower average deal size as well as the lower number of deals will weigh heavily on fees, with Thomson Reuters’ estimating a 33% decrease in fees for the industry as a whole compared to the previous quarter. In this article, we detail the debt capital market performance of the five largest U.S. banks – JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) – in Q3 2015 and also estimate how their fee revenues changed year-on-year as well as quarter-on-quarter.

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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 Q3 2014 and Q2 2015 mentioned here are imputed fees, and not the actual figures reported by the bank.

Bank Proceeds Mkt. Share # Deals Avg. Deal Size Q3’15 Fees Q2’15 Fees Q3’14 Fees
Bank of America $84.0 B 6.8% 299 $281 M $321 M $430 M $410 M
JPMorgan $80.7 B 6.5% 282 $286 M $339 M $556 M $434 M
Citigroup $59.9 B 4.9% 227 $264 M $267 M $326 M $316 M
Goldman Sachs $58.7 B 4.8% 181 $325 M $265 M $362 M $315 M
Morgan Stanley $42.6 B 3.4% 197 $216 M $180 M  $375 M $276 M

Bank of America played a role in debt origination deals worth $84 billion in Q3 2015 – the highest among the U.S. banks. Globally, however, the top spot was captured by Barclays (NYSE:BCS), which was a part of deals worth $84.5 billion. With total proceeds of less just under $81 billion, JPMorgan slipped to the third position globally after maintaining the top spot among all debt originators for fourteen straight quarters. In terms of number of deals, Bank of America ranked #1 globally, followed by JPMorgan. 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.

Notably, Morgan Stanley had a particularly bad quarter, with the total deal figure of $42.6 billion being the lowest for the bank in at least five years. The bank’s debt origination proceeds averaged almost $74 billion for the last five quarter, with the bank participating in more than 320 deals in a quarter on average (compared to less than 200 in Q3 2015).

The average deal size among these banks remained largely unchanged, with the figure falling slightly from $279 million in Q2 2015 to $274 million. Goldman Sachs fared better than any other bank in this regard, with an average deal size of $325 million for Q3 2015. Notably, Goldman has reported the highest average deal size for seven 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, with imputed fees of $339 million this quarter. This figure is almost 40% lower than the figure for the previous quarter, and represents a 22% decline year-on-year. Notably, each of the U.S. banks are expected to report Q3 2015 debt origination fees that are significantly lower than the figures for Q2 2015 and Q3 2014. Morgan Stanley is likely to be hit the most as a result of its exceptionally poor performance this time around. Taken together, these five banks are estimated to have earned around $1.3 billion in fee revenues from debt origination activities in Q3 2015 – 33% lower than the $2 billion figure for the previous quarter. This is exactly in line with Thomson Reuters’ estimate for the larger industry.

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 Q3 2015, Thomson Reuters Deals Intelligence []