Recovery In Global Equity Markets Should Help Banks’ Q4 Underwriting Fees

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2015 closed on a positive note for equity markets around the globe, as sharp losses witnessed in August due to weak global economic cues were reversed to a great extent over the fourth quarter. While many companies had been forced to put off their plans to raise money from stock issuances in the third quarter, improving sentiment helped equity underwriting activity recover considerably in Q4. Quarterly data compiled by Thomson Reuters shows that companies around the world raised $208 billion through IPOs and follow-on offerings in Q4 2015. [1] This is a marked improvement from the dismal $141 billion figure for the previous quarter – the lowest since Q2 2012 – and is also slightly better than the $200 billion figure a year ago. The number of equity underwriting deals also improved sequentially from 918 in Q3 2015 to 1,236 in Q4.

As the equity underwriting fees earned by investment banks depend on the total size as well as the total number of deals completed over a period, the improvement on both fronts indicates a reversal of fortune for the banks in Q4. Thomson Reuters’ data estimates that equity underwriting fees for the industry as a whole this quarter were roughly 40% higher than in the previous quarter. In this article, we detail the equity capital market performance of the country’s five largest investment banks in Q4 2015, and also estimate the changes in each of their fee revenues compared to Q4 2014 and Q3 2015.

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The table below summarizes the performance of the equity underwriting units at each of the five largest U.S. investment banks based on data released by Thomson Reuters earlier this week.

Bank Deal Size Mkt. Share # Deals Avg. Deal Size Q4’15 Fees Q3’15 Fees Q4’14 Fees
Morgan Stanley $18.1 B 8.7% 87 $208 M $306 M $235 M $365 M
JPMorgan $15.2 B 7.3% 72 $210 M $211 M $244 M $303 M
Bank of America $13.9 B 6.7% 60 $231 M $235 M $113 M $312 M
Goldman Sachs $13.3 B 6.4% 75 $177 M $235 M $169 M $324 M
Citigroup $11.2 B 5.4% 66 $170 M $146 M $137 M $252 M

Morgan Stanley held on to the top spot among U.S. investment banks for a second consecutive quarter, with a role to play in deals worth $18.1 billion – representing a market share of 8.7%. The investment banking giant was also a part of 87 equity underwriting deals in Q4 – more than any other bank globally.

Although Goldman fell to the #4 spot in Q4 from being #2 in Q3, the bank’s strong showing in the first two quarters of the year ensured its position at the top of the list for full-year 2015. Goldman had a hand in deals worth almost $72 billion in 2015 (8.3% market share overall) – comfortably higher than the $69 billion figure for Morgan Stanley (7.9% market share), and $67 billion for third-placed JPMorgan (7.7% market share).

Before we detail the trends in imputed fees as shown in the table above, it should be noted that imputed fees are merely an estimate based on historical data about banks’ fees for a particular role in the equity underwriting process. The numbers the banks actually report will likely differ from these figures. But these numbers do give a good indication of what to expect.

In terms of equity underwriting fees, Morgan Stanley also appears to have outperformed its peers to pocket more revenues than any other investment bank. The bank is expected to report around $306 million in these fees for Q4 2015 – a 30% improvement sequentially. However, the figure is still 16% lower than what the bank earned in Q4 2014. This trend of a quarter-on-quarter improvement in equity underwriting fees is seen for all banks here, with JPMorgan being the only bank to break this trend with a sequential reduction in these fees. Taken together, the five banks are expected to make roughly $1.1 billion in equity underwriting fees for Q4 2015 – 26% higher than the figure for the previous quarter. This implies that the largest U.S. banks fared worse than the overall industry, as Thomson Reuters estimated a 40% sequential reduction in these revenues at the industry level.

These banks are likely to report fee revenues that are considerably lower than what they reported a year ago. Total equity underwriting fees for these five banks taken together are expected to fall roughly 27% year-on-year. While a reduction in the number of deals (1,236 in Q4 2015 vs. 1,286 in Q4 2014) would have played a role in this sharp decline, it would also appear that the banks accepted lower compensation fees this time around in a bid to coax companies to raise capital through equity markets.

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Notes:
  1. Global Equity Capital Markets Q4 2015, Thomson Reuters Deals Intelligence []