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INVESTMENT BANKING & CAPITAL MARKETS
Market Report – Q3 2003 Edition
New York, Frankfurt
November 18th, 2003
THE BOSTON CONSULTING GROUP
-1-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
TABLE OF CONTENTS
Chapter Page
Overview of 3rd quarter 2003
Market review
• Corporate finance
• Fixed income trading
• Equity trading
Data definitions
2
9
16
21
28
-2-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Overview of 3rd Quarter 2003
-3-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
RISING INTEREST RATES AFFECTED INVESTMENT BANKING RESULTS IN THIRD QUARTER
BCG’s investment banking performance index declined by 3 points to 59.9 percent• Fixed income growth of the previous quarters ended • Revenues of top investment banks declined 13 percent from previous period
Investment banks improved their profit margins from 31% on average in the previous quarter to 33% in the current period
• U.S. investment banks in particular created a highly flexible cost base during the downturn and lowered operating expenses quickly to meet the revenue decline
The continuing recovery in global stock markets has yet to generate enough equity and corporate finance revenues to compensate for the decline in fixed income trading
• Fees in underwriting and advisory often deferred and thus don’t immediately translate into revenues
• Rising rates depressed the refinancing activity, reducing bond underwriting volumes
-4-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
END OF THE BOND RALLY DEPRESSED BCG PERFORMANCE INDEX IN THIRD QUARTER 2003
BCG IB Performance IndexIndexed
59.962.758.6
44.642.648.651.4
56.956.1
80.171.469.8
108.2100
72.6
0
20
40
60
80
100
120
Q1/00 Q2/00 Q3/00 Q4/00 Q1/01 Q2/01 Q3/01 Q4/01 1Q/02 2Q/02 3Q/02 4Q/02 1Q/03 2Q/03 3Q/03
2000 2001 2002 2003
Note: BCG IB performance index is calculated based on profitweighted volume trends in M&A, ECM, Equity Sales & Trading and Bond Origination
Source: Dealogic; SDC; Autex; BCG analysis
: BCG IB performance index is calculated based on profitweighted volume trends in M&A, ECM, Equity Sales & Trading and Bond Origination
Source: Dealogic; SDC; Autex; BCG analysis
Note
-5-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
BOND TRADING SURGE ENDED IN THIRD QUARTER 2003Recovery in Equities and Advisory Business
0
50
100
150
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03
$BCorporate Bonds Origination
0
200
400
600
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03
M&A Advisory(1)
$B
0
200
400
600
800
1000
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03
$BUS Bond Trading(2)
0
2
4
6
8
10
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03
Equity Trading
US
Asia
Europe
$tr
(1) Based on effective transactions(2) Daily average trading volumes for treasuries, agencies, ABS/MBS, corporate bondsSource: Dealogic; SDC; FIBV; Fed. Reserve Bank of New York; BCG analysis
-6-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
INVESTMENT BANKING MARGINS IMPROVED DESPITE DECLINING REVENUES
Q3/2003 vs. Q2/2003
Q2/03
Q3/03
10%
20%
30%
40%
50%
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Revenues($B)Ø –12.8%
Ø+2
.4% LB
ML
GS
MS
JPMC
Citi
BS
Q3/03 Ø: 33.5%
Q2/03 Ø: 31.1%
DB
CSFB
UBS
Gross profitmargin (%)
Note: Ø calculated on a revenue weighted basis; Operating revenue for investment banking and institutional sales and trading; extraordinary charge-offs excludedSource: Company reports, BCG analysis
-7-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
RESULTS SIGNIFICANTLY BETTER THAN A YEAR AGOQ3/2003 vs. Q3/2002
Q3/02
Q3/03
10%
20%
30%
40%
50%
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
LBML
GS
MS
JPMC
Citi
Ø+1
5.3%
BS
Q3/03 Ø: 33.5%
Q3/02Ø: 18.2%DB
UBS
CSFB
(-13.2%) (-14.3%)
Gross profitmargin (%)
Revenues($B)Ø +22.8%
Note: Ø calculated on a revenue weighted basis; Operating revenue for investment banking and institutional sales and trading; extraordinary charge-offs excluded Source: Company reports, BCG analysis
-8-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
TRADING AND CORPORATE FINANCE REVENUES DECLINEDGoldman Sachs Has Highest Share Of Corporate Finance Revenues
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
0.5 1.0 1.5 2.0 2.5 3.0 3.5
Q2/03
Q3/03
10%
15%
20%
25%
30%
35%
0.0 0.2 0.4 0.6 0.8 1.0 1.2
Corporate Finance Revenues Q3/03 vs. Q2/03
MSLB
Citi
GS
IBD rev as% of totalrevenuesQ3/03
GS
LB
Citi
MSML
JPMC
Revenues($B)
Revenues($B)Ø –17.9% Ø-9.8%
ML
BS BSØ: 77.7%
Ø: 23.0%
JPMC
CSFB
DB
UBS
DB
UBS
CSFB
Trading RevenuesQ3/03 vs. Q2/03
Tradingrev as% of totalrevenuesQ3/03
Note: Trading and corporate finance revenues don‘t add up to 100% because of ‘Other’ revenueSource: Company reports; BCG analysis
-9-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Market review:
Corporate finance
-10-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
CORPORATE FINANCE BUSINESS SLOW DESPITE POSITIVE DEVELOPMENTS IN THE THIRD QUARTER 2003
Equity origination recorded the strongest quarterly volume since 2001• Global equity issuance jumped 60 percent from previous quarter• U.S. deal volume more than doubled in last three months
M&A activity in the U.S. improved strongly• Volume of announced deals increased by more than 30 percent from second quarter
However, these positive developments have so far failed to improve results in corporate finance• Fee payments for equity and m&a transactions are generally deferred• Decline in bond underwriting ate up gains from equity and advisory
Goldman Sachs continued to be the dominant investment bank in high margin equity underwriting and advisory businesses in third quarter of 2003
• Lazard has improved its position in global m&a under Wasserstein’s leadership
The integrated corporate and investment banks dominated the bond underwriting business• Morgan Stanley only bulge bracket firm in the top five underwriters, but still 50%
behind the market leader• Citigroup leads bond underwriting in the U.S. and Deutsche Bank in Europe
-11-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
M&A and Equity Origination
EQUITY UNDERWRITING BOOMED IN ASIA AND THE U.S.Market Volumes
M&A and Equity Origination
ECM Announced M&A deals
2840
1624 24
3017 15
22 22 20
26
36
15
3224
31
13 1510
17
42
15
9
13
10
11
13
158 7
10
17
0
20
40
60
80
100
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
$B
69
85
44
6659
74
Global
US
Asia
Europe
45
37 39
217 185110 109 108 138
96154 164
122 111
261
210305
245
106133
149103 69
95 124
61
64 42
46
33
5838 48
42 60 42
0
100
200
300
400
500
600
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
$B539
459 457
400
247
329283
306275
49277
79
277
Source: Dealogic; SDC; BCG analysis
-12-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
M&A and Equity OriginationM&A and Equity Origination
CITIGROUP LOST SHARE IN U.S. BUT GAINED IN EUROPEAN ECM
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Gained share
Lost share
ECM Europe
ABN
HSBC
GS
DB
CSFB
ML
MS
Citi
JPMCUBS
BNPCA Cazenove
Relative market-position 9M02
ING
DKWLB
CL SG
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Gained share
Lost share
ECM US
GS
DB
CSFB
ML
MSCiti
JPMCLB
UBS
BS
BoA
Relative market-position 9M02
Wachovia
Thomas Weisel
Relativemarket-position9M03
Relativemarket-position9M03
Note: Relative to market leaderSource: Dealogic; SDC; BCG analysis
-13-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
M&A and Equity Origination
GOLDMAN SACHS REMAINED THE GLOBAL LEADER IN M&AM&A and Equity Origination
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Gained share
Lost share
M&A Europe
BNP
ABN
GS
DBCSFB
ML
MSCiti
JPMC
UBS
Lazard
CA
Relative market-position 9M02
Greenhill
LBCL
HSBCDKWSG
Rothschild
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Gained share
Lost share
M&A US
GS
DB
CSFB ML
MS
CitiLB
UBS
BSLazard
Relative market-position 9M02
HSBC
BoARothschild
JPMC
DKW
Relativemarket-position9M03
Relativemarket-position9M03
Note: based on Date effective, relative to market leaderSource: Dealogic; SDC; BCG analysis
-14-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Fixed Income Origination
BOND ORIGINATION VOLUMES DECLINEDFixed Income Origination
Corporate BondsAll Bonds
Global
US
Asia
Europe
272 226 148 223 233 221 170 195332
471268
524 551
449523 568
493437 460
640
711
560
43 95
39
5543
6656
61
57
140
68
0
250
500
750
1000
1250
1500
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
$B
839 872
636
801844
780
663715
1029
79 7841 66 53 63
28 38 63 83 64
132 146
87
11693 90
4355
86
128
80
25 29
19
25
18 28
1822
22
28
18
0
100
200
300
400
500
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
$B
236253
147
207
164181
89115
172
1323
239
896
162
Note: Corporate bonds for industrial issuers onlySource: Dealogic; SDC; BCG analysis
-15-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Fixed Income Origination
INTEGRATED CORPORATE AND INVESTMENT BANKS DOMINATED BOND UNDERWRITING
Fixed Income Origination
Corporate bonds Europe
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%Relative market-position 9M02
BNP
ABN
HSBCSG
CA
Barclays
Gained share
Lost share
DB
CSFB
ING
MS
Citi
DKW
JPMC
LB
UBS
BoA
GS
MLCoba
Corporate bonds US
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%Relative market-position 9M02
Gained share
Lost share
Barclays
GSDB
CSFB
ML
MS
Citi
JPMC
LB
UBSBS
WachoviaHSBC
BoA
SGBNP
Relativemarket-position9M03
Relativemarket-position9M03
Note: Relative to market leaderSource: Dealogic; SDC; BCG analysis
-16-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Market review:
Fixed income trading
-17-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
FI TradingFI Trading
BOND TRADING VOLUMES STAGNATED AND REVENUES SUFFERED
Bond trading volume growth ended in third quarter 2003• Overall U.S. bond trading volumes slowed down• Average daily ABS/MBS and corporate bond trading volumes declined by eight and two
percent respectively from previous quarter
As expected, rising interest yields made trading gains difficult• 10-year U.S. Treasury yield increased by a full percentage point in three months period
ending in September• Aggregated fixed income trading revenues of the top ten investment banks declined by
22 percent from last quarter
Banks managed their fixed income risk exposure successfully in the last quarter• Combined value-at-risk of leading investment banks in interest rates, foreign exchange
and commodities declined by 18 percent from previous quarter• Goldman Sachs took highest risks in fixed income trading
-18-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
FI Trading
FIXED INCOME TRADING RALLY SLOWED IN 3RD QUARTERABS/MBS Refinancing Activity Declined
FI Trading
US Daily Average Bond Trading Volumes Growth
364 426 430 428 474 477 457530 555
108132 133 137
166 188 206
230 211
99
97 104 120116 124 134
149 146
0
200
400
600
800
1000
Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
$B
571
656 667 685756 789 797
909 911
Total
MBS/ABS
Corp. Bonds
Treas/Agencies
26% 26%
5%
16%17%
-8%
48%
27%
-2%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
3Q/03 vs. 2Q/03 3Q/03 vs. 3Q/02 9M03 vs. 9M02
+/-0%
20.5% 27.6%
Note: Daily average trading volumes, with Interdealer Brokers and othersSource: Fed. Reserve Bank of New York; BCG analysis
-19-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
FI TradingFI Trading
TREASURY YIELDS ROSE OVER 100 BASIS POINTS IN THIRD QUARTER 2003
Directly Affecting Fixed Income Revenues
Fixed Income Trading Revenues By Quarter (Indexed)
0
25
50
75
100
125
150
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
(%)
10088
97
126
8075
124
2
3
4
5
6
Jan-02
Mar-02
Jun-02
Sep-02
Dec-02
Feb-03
May-03
Aug-03
Nov-03
(%)
+138
bp
Jan-02
Jun-02
U.S. Government Bond Yield
Note: 10-year U.S. Treasury bonds; aggregated revenues for top 10 investment banksSource: Bloomberg, S&P, company results
-20-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
FI Trading
TOP TEN INVESTMENT BANKS MANAGED VALUE AT RISK SUCCESSFULLY IN THIRD QUARTER
FI Trading
Market Risk: Combined Value-at-Risk Risk Efficiency Q3/03
414 448 433 461588
494
83 88109
137
947962 55
91
74
71
378412
67 106795982
0
200
400
600
800
1000
Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
563 577570543
593662
799$M
659
Total VAR
FX
Commodities
Interest rate
FixedIncomeTradRev$M
0
500
1,000
1,500
2,000
0 25 50 75 100
VAR$M
‘Broker’
‘Trader’
JPMC
MS
DBCiti
GS
UBS
CSFB
ML
LB
BS
Ø all players
Note: VAR at 99% confidence/1 day intervals for interest rate, currency,commodities price risk; differently reported VARs converted assuming normal distribution of risk positions
Source: Company reports, BCG analysis
-21-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Market review:
Equity trading
-22-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity TradingEquity Trading
SUMMARY EQUITY TRADING
Global stock markets continued their recovery in third quarter 2003• All major global equity indices rose in the three months ending September• Nikkei stock market index climbed 19 percent year to date
Increased trading volumes did not translate into revenue gains in third quarter 2003• While global volumes picked up 9 percent to USD 8.7 trillion, • Aggregated equity trading revenues of top ten investment banks declined by 9 percent• Low-margin program trades continued to gain market share at NYSE
Investment banks took increased equity trading risks to generate equity trading income• UBS, Deutsche Bank and Goldman Sachs took the highest market risk relative to their
equity trading revenues• Merrill Lynch and Lehman Brothers were the most “risk efficient” banks in equity trading
UBS continued to gain market share in European and U.S. equity trading and was the leading equity trading house in the third quarter measured by revenues
-23-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity trading
GLOBAL EQUITY PRICES CONTINUED TO RISEEquity trading
1%13%
19%5%
22%9%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
YTD 2003 Last 12M
Growth
0
20
40
60
80
100
120
J A J O J A J O J A J O
Nikkei225 S&P500
FTSE E300
1Q02
S&P 500
Nikkei 225
FTSE E300
3Q01 3Q02 1Q031Q01 3Q03
Development of Main Equity Indices(1)
(1) Indexed Note: YTD 10/15/03Source: Thomson Financial Datastream
-24-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity tradingEquity trading
INCREASED EQUITY TRADING ACTIVITY DID NOT PRODUCE REVENUE GAINS IN THIRD QUARTER
Global
US
Asia
Europe
Equity Trading Revenue By Quarter (Indexed)
0
20
40
60
80
100
120
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03
%100
76
54 55 52 5245
4247
5257
Global Exchange Trading Volumes
3.6 3.2 2.8 2.9 2.4 2.7 2.4 2.3 2.2 2.5 2.6
7.3
6.0
4.6 5.25.1 4.9
4.4 4.3 3.84.5 4.6
1.0
0.9
0.70.9
1.0 1.00.8 0.8
0.8
1.1 1.4
0
2
4
6
8
10
12
14
Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 4Q/02 1Q/03 2Q/03 3Q/03
$tr 11,9
10,1
8,28,9
8,4 8,67,6 7,4
6,8
8,08,7
Note: Single counted, includes investment funds traded at exchanges;aggregated trading revenues for top 10 investment banks
Source: FIBV; BCG analysis
-25-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity trading
REVENUE OPPORTUNITIES IN EQUITY TRADING INCREASINGLY RISKY
Equity trading
Equity Price Risk Risk Efficiency Q3/03
0
50
100
150
200
250
300
4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03
195 204
227
191182 184
Value-at-risk$M
214230
TradRev$M
0
250
500
750
1,000
0 10 20 30 40 50VAR(1)
$M
‘Broker’
‘Trader’
GS
UBS
Citi
MS
CSFB
JPMC
DB
ML
LB
BS
Total
JPMC
MSDB
CitiGS
UBS
CSFB
ML
LB
BS
Ø all players
Note: VAR at 99% confidence/1 day intervals for equity price risk; differently reported VARs converted assuming normal distribution of risk positions
Source: Company reports, BCG analysis
-26-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity tradingEquity trading
SHARE OF PROGRAM TRADING AT NYSE CONTINUED GROWTH TREND
Program trading share NYSE 2003
0
10
20
30
40
50
60In week ofJun30, program trades involved more than 50% of NYSE
trading volume
Jan Feb Mar Apr May Jun Jul
% of alltrades
Aug Sep Oct
Note: 50% means that in 50% of trades there is a program trade involved on one side of the trade Source: NYSE
-27-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Equity trading
MERRILL MAINTAINED TOP POSITION IN THE U.S. BUT COMPETITORS CLOSED GAP
Equity trading
Institutional equity trading Europe
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
ABN
HSBC
Gained share
Lost share
GS
DB
CSFBML
MS
Citi
DKWJPMC
LB
UBS
Relative market-position 9M02
Cazenove
SG
Coba
BoA
Institutional equity trading NYSE
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
BoA
Knight
Gained share
Lost share
GS
DB
CSFB
ML
MS
Citi
JPMC
LB
UBS
BS
Relative market-position 9M02
Wachovia
ABN
SG
Relativemarket-position9M03
Relativemarket-position9M03
Note: ML includes HHG; GS includes SLK; DB includes NDB; ABN includes ING US;relative market positions are based on number of traded shares relative to market leader
Source: Autex; BCG analysis
-28-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
Data Definitions
-29-Q3 2003 Market Report-BR-TM-NYC-18Nov03.ppt
DATA DEFINITION OVERVIEW
Regional deal allocation is based on issuer’s country (parent issuer’s country where available). M&A deals are allocated by target nation
European data comes from Dealogic; U.S. and Asian data from Thomson Financial Securities Data
Relative market shares are based on bookrunner league tables
Equity origination data include common stock IPOs and secondary issues only
Bond origination data contain all convertible and non-convertible bonds including ABS, MBS, municipals, agency, and corporate bonds
Corporate bonds are limited to industrials and utilities excluding financial services issuers
Equity trading data reflects institutional block trades as advertised in Autex Blockdata
Goldman Sachs’, Lehman Brothers’, and Morgan Stanley’s 3rd quarter ended in August 31st , all others in September 30th, 2003