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