May 14 2014, 12:55pm CDT | by Forbes
The global debt capital markets saw a considerable improvement in activity over the first three months of the year compared to the second half of 2013, when uncertainty about the timing of the Fed’s tapering plans kept the industry in a state of flux. We talked about this in detail last month, based on quarterly debt origination data released by Thomson Reuters, highlighting the expectation that investment banks would report higher Q1 debt origination fees than those for Q4 2013, but lower compared to Q1 2013 numbers.
Now that the banks are done reporting their Q1 results, we follow up with a side-by-side comparison of the actual debt origination fees pocketed by the country’s five largest investment banks – Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America-Merrill Lynch and Citigroup.
The global debt capital markets grew to $1.57 trillion in size in Q1 2014 – slightly higher than the $1.52 trillion figure for the same period last year and 18% above the $1.33 trillion in Q4 2013. But the period was also the worst in terms of number of debt origination deals since Q3 2011, indicating that market growth was fueled by a much higher average deal size this time around. As the number of deals for a quarter influences revenues more than the absolute size of deals, the period was expected to be a mixed one for the investment banks.
The table below was compiled based on the banks’ earnings announcements and shows the debt origination fees that the five banks earned over the last five quarters.
|(in $ mil)||Q1’13||Q2’13||Q3’13||Q4’13||Q1’14|
|Bank of America||1,022||987||810||986||1,025|
Bank of America had a good start to the year, raking in more than a billion dollars in debt origination fees for the quarter – a good 45% higher than what its nearest rival (JPMorgan) made for the period. Notably, the diversified banking group brought in slightly more fees in Q1 2014 compared to what it did in the first quarter of 2013, and the quarter-on-quarter improvement was 4%. The bank has made more money helping companies raise debt capital than any other investment bank in 10 of the last 13 quarters (the exceptions being Q1 2011, Q1 2012 and Q3 2013). The strong performance, despite the fact that Bank of America ranked fourth among investment banks in terms of market share in Q1, suggests that the bank frequently lands the most important (and hence best-paying) roles in the largest debt origination deals. The bank’s considerably higher average deal size among its peers also has a positive impact on the fees.
JPMorgan reported a decline in fees for the third consecutive quarter, with revenues falling 12% quarter-on-quarter and 22% year-on-year – making the bank the worst performer in this regard among the banks listed here. This comes as somewhat of a surprise as the bank garnered the largest share of the global debt market for the ninth consecutive quarter in Q1. The discrepancy can be explained by the fact that although the bank played a role in many more deals than its peers, it was likely confined to a secondary role in the biggest deals for the quarter. The only other bank in the list that saw a sequential decline in revenues was Morgan Stanley, although the bank reported debt origination fees that were just 2% lower. As for the remaining two banks, Goldman Sachs and Citigroup, their fees were in line with our expectation of Q1 fees that were better than Q4 2013 figures, but also well below those for Q1 2013.
Total annual debt capital market fees for these five banks increased from $3.3 billion in Q4 2013 to $3.5 billion – a 5% growth. But the sum was 6% lower than what it was a year ago. This means that while debt origination fees at the largest investment banks followed the trend seen in the overall industry, the fluctuations were markedly lower. Going forward, as investors express concern about the Fed implementing its tapering plan too rapidly, as well as slowing economic growth in China, we expect debt markets to remain depressed for a couple of quarters before beginning to grow.
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