Bank of America and Citi did not have a good crisis, and were hit hard by bank fines. But in recent years they’ve been at the forefront of serious assaults on the top tier of global investment banking, with both firms hiring ambitiously and setting up targets to be in the top three across all products.
This quarter’s advisory figures show that project starting to succeed — while M&A fees and volumes were broadly flat, both banks recorded huge increases, with BAML up 43% and Citi up 32%. That’s still a long way behind first-placed Goldman, on $749m in advisory revenue for the quarter, but it shows a pair of franchises in the ascendant.
M&A is a lumpy business, where a couple of big deals can transform fortunes, but there’s definitely a deliberate plan at work here — Citi’s John Gerspach explained on the analyst call that the bank’s cuts to client lists actually helped, increasing focus and pushing it up the value chain.
Far less lumpy is DCM, where banks tend to make money from converting long-term lending relationships into mandates, and where borrowers tend to rotate their lead managers among
Fantastically profitable mandates do come along, particularly in acquisition finance and securitization, but rarely are these juicy enough to show up in quarterly reporting. Goldman’s Swancastle deal was one such example, as exclusively reported in GlobalCapital last year, but Morgan Stanley may have stumbled on something of the kind — DCM was up 46% this quarter, with the rest of the Street in single digits.
Morgan Stanley’s DCM business is smaller in absolute terms than the very top firms — $504m this quarter against JP Morgan’s $917m and BAML’s $926m — but if its success is down to a few game-changing mandates, then that still implies deals delivering $100m-ish. All MS would say was that the increase was down to “higher non-investment grade loan and investment grade bond fees”, which pretty much comes down to saying “higher DCM revenues were down to higher DCM revenues”.
Goldman was the big loser this quarter, again, though the firm is in part a victim of its own high expectations. Once again, the firm’s fixed income business performed sharply worse that everyone else’s — down 40%, against strong second quarter last year, while the other US firms were down far less.
This time, though, Goldman tried to explain, rather than stone-walling. Chief financial officer Marty Chavez highlighted the bank’s extensive commodities business, as well as its orientation towards active asset managers, rather than corporate clients in derivatives.
For the industry, though, there are still big questions about the long-term viability of fixed income trading. It’s the largest business at most of the investment banks GlobalCapital writes about, and ought to get larger as rates increase and yield curves re-steepen, but it’s still structurally challenged.
Electronification, central clearing and regulation may end of up hollowing out the more profitable corners of the market. Employment in fixed income is on a long term trend down — but there are signs that a bidding war for top talent in the sector is underway, leaving the overall industry less viable than ever.
The European banks start to report this week, with Credit Suisse, Barclays, BNP Paribas and UBS all on Friday. According to Deutsche’s research team, the US bank figures suggest strength for Credit Suisse and UBS (with decent equities, wealth management making the running).
But other idiosyncratic factors may have helped the Europeans — trading around the French election, for example, should feed straight into BNPP’s fixed income business, at the top of the table for OATs for the past decade.
The DB team have worse news for primary markets though — “stronger primary at the US banks is unlikely to be replicated at the European banks as they continue to lose market share”, say the team.