Largest U.S. Banks Likely To Report Higher Equity Underwriting Fees Despite Losing Market Share
The fourth quarter of the year is usually a slow period for the global equity underwriting business, but the rally in equity markets worldwide in Q4 2017 helped equity capital markets recover from the sub-par levels seen in Q3 2017. Although there was a noticeable improvement in the number of IPOs and follow-on offerings in the U.S. and Europe, the Asia-Pacific region was the largest driver of growth in the industry. At the same time, there was a sharp increase in the number of smaller deals over the period. Taken together, these two factors drove total equity underwriting proceeds for the five largest U.S. investment banks sharply lower from almost $69 billion in Q3 2017 to $60 billion in Q4 2017 even though the overall industry grew by 3% over this period.
The chart below captures the total size of equity capital market deals completed by the five largest U.S. investment banks since Q4 2016. The green-to-red shading for figures along a row show the variations in deal size for a particular bank over this period.
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Equity underwriting volumes for individual banks were taken from Thomson Reuters’ investment banking league tables for the last five quarters. The table below captures the respective market shares for each of these banks over this period. The green-to-yellow shading for figures in a quarter should help compare the relative standings of these 5 banking giants in a particular quarter.
It should be noted that the largest equity capital market deals (IPOs and FPOs) employ more than one investment bank, and the market share figures here factor in the proportion of the total proceeds generated by a particular bank.
Market Shares Under Pressure
Notably, the five largest U.S. investment banks have captured the top five ranks in the global equity underwriting league table for almost every quarter over the last few years. Their market shares have been under pressure since 2016, though, as IPO activity in the U.S. – their core market – was depressed, even as China saw a spurt in equity underwriting deals. The fragmented nature of the Chinese market has made it more difficult for these banks to gain a strong foothold in the region – although Goldman and Morgan Stanley have definitely done better than many of their American and European peers.
Despite these headwinds, the five largest U.S. banks increased their market share to over 36% in Q3 thanks to their role in several multi-billion dollar deals for the quarter. In the absence of such mega-deals in Q4, their market share slumped to 31%. This compares to the average market share of 35.7% for these banks over the first nine months of 2017 and 32.6% for full-year 2016. However, the record high number of equity underwriting deals for the fourth quarter is expected to boost fee revenues for Morgan Stanley, Goldman as well as JPMorgan based on their imputed fee estimates by Thomson Reuters. This can be explained by the fact that fees as a percentage of total deal size is much smaller for the largest deals, so the banks benefit from being a part of a large number of small-sized deals rather than from being a part of a few large-sized deals.
You can see how changes to Goldman’s share of the equity underwriting industry impact our $245 price estimate for the bank’s shares by modifying the chart below.
See the links below for more information and analysis about the 5 largest U.S. investment banks:
- How Much In M&A Advisory Fees Did The 5 Largest U.S. Investment Banks Generate In 2016?
- How Much In Equity Underwriting Fees Did The 5 Largest U.S. Investment Banks Generate In 2016?
- How Much In Debt Origination Fees Did The 5 Largest U.S. Investment Banks Generate In 2016?
- How Much In Total Advisory & Underwriting Fees Did The 5 Largest U.S. Banks Earn In 2016?
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