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."
About The Boston Consulting Group
Since its founding in 1963, The Boston Consulting Group has focused on
helping clients achieve competitive advantage. Our firm believes that best
practices or benchmarks are rarely enough to create lasting value and that
positive change requires new insight into economics and markets and the
organizational capabilities to chart and deliver on winning strategies. We
consider every assignment to be a unique set of opportunities and
constraints for which no standard solution will be adequate. BCG has 61
offices in 36 countries and serves companies in all industries and markets.
For further information, please visit our Web site at http://www.bcg.com.
SOURCE The Boston Consulting Group