Slump In Global Equity Underwriting Volumes Over Q3 Will Hurt Results For Investment Banks

The strong activity levels that have characterized global equity capital markets over the last few quarters were absent in the third quarter, with companies around the globe raising just $158 billion in fresh capital through IPOs and FPOs for the period  according to quarterly data published by Thomson Reuters. This compares to equity deal volumes exceeding $200 billion in the previous quarter, and is also much lower than the $189 billion in equity capital raised a year ago. While the lower activity level can be partially explained by the seasonal nature of the industry, the primary reason is the significant reduction in equity underwriting volumes across regions globally.

While Australia stands out as the only region to witness any gains year-on-year as well as quarter-on-quarter, equity capital market deals in the EMEA (Europe, Middle East and Africa) and Latin America regions fell by 40-50% sequentially. This hurt the market shares and fees for the European investment banks in particular, with U.K.-based investment banking giant Barclays capturing a market share of less than 2% in a quarter for the first time in at least eight years.

The total number of global equity issuances fell sharply from 1,344 in Q2 2018 and 1,288 in Q3 2017 to just 1,129 in Q3 2018. Like we mentioned earlier, this trend can be attributed partially to the fact that the third quarter is seasonally slow period. However, there was a noticeable weakness in global equity markets over the most recent quarter due to growing fears of a trade war, which clearly weighed on companies’ plans to raise cash by issuing shares. This also explains why the number of deals is much lower than the average figure of ~1,275 deals in a quarter over the last four years.

With the total equity underwriting volumes as well as the number of deals falling considerably, the average deal size also fell from over $150 million in each of the last two quarters of the year to $140 million in Q3.

Notably, as larger equity underwriting deals generate lower fees per dollar raised compared to smaller deals, a lower average deal figure is usually a good thing for investment banks in terms of the total fees they potentially generate. However, as the number of deals that went through in the quarter was notably lower, the overall result was a sharp reduction in total equity underwriting fees from $5.26 billion in Q2 2018 to just $4 billion in Q3 2018. This represents a sequential decline of roughly 24%, and is also 15% lower than the $4.7 billion figure from a year ago.

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

Details about how changes to Equity Underwriting Fees (and other Investment Banking Fees) affect the share price of these banks can be found in our interactive model for Goldman Sachs | JPMorgan | Morgan Stanley | Bank of America | Citigroup

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