Largest Investment Banks Unlikely To Benefit From The Sequential Improvement In Global Debt Origination Fees

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The second quarter of the year was largely a lukewarm period for global debt capital markets. This was partially because the period is seasonally slow compared to the first quarter of the year, but primarily because the strong equity market rally – coupled with the Fed’s ongoing rate hike process – made equity issuance a more cost-effective option for companies looking to raise cash. Despite these headwinds, companies around the globe raised $1.78 billion worth of fresh debt over the quarter – nearly identical to the figure for the previous quarter, and slightly better than the figure a year ago, according to quarterly data published by Thomson Reuters.

The total number of global debt origination deals improved from the unusually low figure of 4,734 for Q1 2018 to reach 5,772 in Q2. Notably, this is lower than the average figure of ~6,250 over the three quarter period from Q2 to Q4 2017. But the upbeat figures for this period can be attributed to the flurry of debt capital deals for this period in view of the Fed’s strong outlook for interest rate hikes. Keeping this in mind, the number of deals for Q2 2018 marks a strong sequential recovery in the industry.

As smaller debt origination deals generate more fees per dollar raised compared to larger deals, the lower average deal size for Q2 2018 led to an notable improvement in fees for the industry as a whole, as highlighted in the chart below. Data compiled by Thomson Reuters estimates that total debt origination fees earned by global investment banks for the first quarter was $7.1 billion. This is substantially better than the $6.7 billion in fees for Q1 2018, and is also slightly better than the $7 figure for Q2 2017.

However, Thomson Reuters’ data indicates that the total fees for the 25 largest investment banks in the world actually fell between Q1 2018 and Q2 2018 – from $4.48 billion to $4.27 billion. This represents a reduction in wallet share for the top 25 investment banks from 67% to 60%. The sequential 5% reduction in fees for the largest banks despite a 6% improvement at an industry level indicates that a sizable chunk of debt origination fees in Q2 was eaten up by smaller players – especially regional players in more fragmented markets like Asia Pacific and Latin America.

We will capture the changes in market share for the five largest U.S. investment banks over recent quarters in a follow-up article, along with details of the expected increase/decrease in debt origination fees for each of these banks year-on-year and sequentially.

Details about how changes to Debt Origination Fees (and other Investment Banking Fees) affect the share price of these banks can be found in our interactive model for Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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