Improving M&A Activity Will Not Show In Q2 Advisory Fees For Largest U.S. Banks

by Trefis Team
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The global M&A industry saw a decline in the total size of completed deals for a second consecutive quarter, with investment banks helping companies close deals worth $482 billion for Q2 2014 – 11% lower than the $540 billion figure for the previous quarter and 5% below that for the same quarter last year. ((Global M&A Financial Advisory Q2 2014, Thomson Reuters Deals Intelligence)) Interestingly, the $1-trillion figure for completed M&A deals over the first half of the year is in sharp contrast to the almost $1.8 trillion in announced M&A deals over the same period. In fact, data compiled by Thomson Reuters shows that $1.1 trillion in new deals were announced in the second quarter alone, making the first half of 2014 the strongest first half in this regard since 2007. This major discrepancy between announced and completed deal volume can be explained by the fact that 14 of the 15 largest deals announced over this period have yet to close.

While Thomson Reuters’ data estimates a 15% increase in fees for the industry as a whole in Q2 2014 compared to Q1 2014, the biggest banks could end up with fee revenues up to 30% lower than what they saw in the previous quarter. This is because their advisory desks were tied up with the biggest deals announced in Q2, and as banks earn fees for their advisory services when deals are completed, these revenues will be realized over the coming months as the deals close. In this article, we detail the performance of the largest U.S. investment banks – Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) – in the global M&A arena in Q2, while also detailing the expected changes in advisory revenues for each of them year-on-year as well as quarter-on-quarter.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The U.S. banking giants garnered a strong share of the $482 billion in M&A deals that were completed in Q2 2014, with the five banks taking up the top 5 ranks in the industry globally. The table below summarizes the Q2 performance of the M&A unit at each of these banks according to Thomson Reuters’ Deals Intelligence data. It should be noted that most deals employ more than one bank, which is why the sum of market shares for just these five banks is more than 90%.

Bank Deal Size Mkt. Share # Deals Avg. Deal Size Q2’14 Fees Q1’14 Fees Q2’13 Fees
Morgan Stanley $100.4 B 20.8% 73 $1.38 B $369 M $299 M $322 M
Goldman Sachs $99.5 B 20.6% 84 $1.19 B $400 M $560 M $361 M
JPMorgan $84.1 B 17.4% 67 $1.26 B $350 M $363 M $260 M
Bank of America $79.5 B 16.5% 49 $1.62 B $223 M $316 M $244 M
Citigroup $77.9 B 16.2% 56 $1.39 B $210 M $166 M $234 M

Morgan Stanley inched past Goldman Sachs to take the top spot in the ranking for Q2 by being the only investment bank to help close more than $100 billion in deals over the period. This is only the third time in the last 12 quarters that Goldman was beaten to the top spot by a rival – the other two instances being Q1 2013 and Q2 2013. The fact that both banks have been busy with mega-sized deals is clear from the fact that their market share shrank from roughly 40% each in Q1 to under 21% each in Q2.

In terms of number of deals closed, though, Goldman remains #1 for the seventh consecutive quarter with a role to play in 84 deals. Interestingly, Goldman Sachs had a considerably lower average deal size than the other banks detailed here. This indicates that the bank was not a part of some of the biggest deals that closed this quarter. On the other hand, Bank of America likely played a role in most of the largest deals, thanks to which it had the highest average deal size here of $1.6 billion. Citigroup also recovered from the poor Q1 performance when it ranked 11th, to regain the #5 position it achieved for full-year 2013.

Coming to fee revenues for these banks, three of the banks are expected to report a sequential decline with Bank of America’s 30% fall being the worst. The lower fees for Bank of America despite the highest average deal size indicates that the bank played supporting roles in a majority of the large deals. Goldman is likely to see a decline of around 28% in fees, followed by a roughly 5% reduction for JPMorgan. On the other hand, Morgan Stanley and Citigroup are slated to do better than the industry average, with advisory fees jumping 23% and 27%, respectively.

It must be noted here that Q1 2014 was a particularly strong quarter for Goldman, whereas both Morgan Stanley and Citigroup saw unusually low revenues for the same period. So not all of the quarter-on-quarter changes detailed above can be attributed purely to each of the bank’s performance in Q2. Moreover, it should be noted that imputed fees are merely an estimate based on historical data about fees demanded by the banks for a particular role in the complex M&A advisory process. Despite the fact that banks often report numbers which differ considerably from these figures, imputed fees are generally a good indicator of what to expect.

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