Investment Banks To Take A Hit In Q3 As Global Debt Origination Volumes Decline

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Seasonal headwinds, coupled with the growing reluctance of U.S. companies to tap the debt capital markets for cash in the wake of the Fed’s ongoing rate hike process, resulted in total debt origination volumes falling marginally to $1.75 trillion in Q3 2018 from over $1.78 trillion over the previous two quarters, according to quarterly data published by Thomson Reuters. Notably, this compares to the post-recession high of over $2 trillion seen in Q3 2017, when debt capital market deal activity peaked in anticipation of a steady increase in interest rates over subsequent quarters.

The total number of global debt origination deals remained elevated at 5,605 for Q3 2018. While this is slightly below the 5,772 deals that completed in the previous quarter, and is much lower than the unusually high figure of 7,328 from a year ago, it is well above the average quarterly figure of 4,669 deals over the last five years. However, as the number of deals fell by a larger proportion compared to the total deal volume, there was a sequential increase in average deal size for the quarter from $310 million to $313 million.

As smaller debt origination deals generate more fees per dollar raised compared to larger deals, the increased average deal size for Q3 2018 along with an overall reduction in total deal volume led to a sizable reduction in fees for the industry as a whole. Data compiled by Thomson Reuters estimates that total debt origination fees earned by global investment banks for the first quarter was $6.4 billion – down from $7.1 billion for the seasonally stronger Q2 2018, and substantially lower than the one-time high of $8.4 billion seen in Q3 2017

Notably, Thomson Reuters’ data indicates that the trend of the largest 25 investment banks in the world losing wallet share accelerated in Q3 2018, as the combined total fees for the top-25 banks fell from $4.48 billion in Q1 2018 to $4.27 billion in Q2 2018 and further to $3.75 billion in Q3 2018. This represents a reduction in wallet share for these banks from 67% in Q1 to below 59% in Q3. The decline indicates that smaller industry players – especially regional players in fragmented, yet high-growth markets like Asia Pacific and Latin America – are eating into the business of the largest players.

As we detailed above, most major investment banks are likely to report a decline in their debt origination fees by around 10% compared to the figure for the previous quarter. This will have a noticeable impact on their top line given that these fees constitute nearly 50% of the total investment banking fees for the largest players in the industry. Deutsche Bank stands out in particular, as the German banking giant is likely to report a 40% reduction in these fees sequentially due to a combination of its ongoing struggle to turn its business around and the soft market conditions in Europe.

We will capture the changes in market share for the largest U.S. and European 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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