The Investment Banking Industry Remains on Track for a Record-Breaking Year Despite a Weak Third Quarter

Nov 17, 2006, 00:00 ET from The Boston Consulting Group

    NEW YORK, Nov. 17 /PRNewswire/ -- Although investment banks posted
 weaker performance in the third quarter, the industry held onto gains it
 earned early in the year. Revenues generated by leading players declined by
 13 percent in the third quarter, but they were about 4 percent higher than
 they were one year ago, according to results The Boston Consulting Group
 (BCG) published in its recent quarterly report on the investment banking
 industry. Pretax profit margins decreased by nearly 2 percent in the third
 quarter and were slightly lower than they were one year earlier.
     The industry remains on track to achieve record results in 2006, so
 most investment bankers are looking forward to large bonuses. Still, the
 industry seems to be managing compensation expenses cautiously, and the
 expected growth in bonuses -- about 20 percent -- lags the 27 percent
 growth in industry revenues during the first nine months of 2006.
     Third Quarter 2006 Results
     The BCG Investment Banking Performance Index, which tracks the results
 of ten leading investment banks, fell by about 18 percent in the third
 quarter of 2006 to about the same level it reached in the third quarter of
 2005. The greatest drag on performance was the fall in revenues, which was
 precipitated by slower trading and less deal activity across a range of
 businesses-most of which surged during the first two quarters of 2006.
     Fixed-Income and Equity Trading. The volumes and revenues of
 fixed-income trading fell in the third quarter, due in part to seasonal
 factors. This was also the result of the commodities business -- a
 veritable growth engine in previous quarters-being slowed by lower oil
 prices. Equity trading volumes and revenues also declined, even though
 stock markets around the world rebounded from weak second-quarter
 performance, and demand for equity derivatives, from both retail and
 institutional investors, remained strong.
     Advisory and Corporate Finance. The value of announced M&A deals fell
 for the second consecutive quarter, to about $560 billion -- 21 percent
 lower than it was in the first quarter. The value of equity issuance fell
 by about 25 percent in the third quarter to about 13 percent below the
 level it reached one year ago. For the first time this year, the Americas
 raised less equity than either Europe or Asia -- $28 billion in the
 Americas versus $43 billion in Europe and $38 billion in Asia. Other
 elements of corporate finance also weakened. At the beginning of 2006, for
 example, corporate-bond issuance reached its highest level in nearly three
 years. It has since lost momentum, having dropped about 15 percent since
 the first quarter.
     Focus: Trends in U.S. Listed-Derivatives Trading
     The market for listed derivatives in the United States has experienced
 high growth since 1999, but it is facing increasing margin pressure, with
 electronic execution and the commoditization of derivatives instruments
 driving down prices. As a result, leading futures commission merchants
 (FCMs) are capturing less value per contract traded.
     "The industry has responded with a wave of consolidation," said Svilen
 Ivanov, leader of BCG's investment-banking practice and coauthor of the
 report. "Two types of players have emerged to take up leading positions:
 large brokerage firms, which are integrating derivatives trading with other
 services to broaden their offerings, and independent FCMs, which are
 pursuing a similar track, expanding their offerings to include securities
 lending, margin financing, and other services."
     "This is not the end of consolidation in this market," Ivanov noted.
 "Larger securities houses will continue to broaden their
 derivatives-trading offering by acquiring smaller FCMs, while independent
 FCMs will continue to seek partners to build scale."
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SOURCE The Boston Consulting Group