Global Investment Banking
Investment banks specialize in non-retail financial transactions. These include underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for institutional clients.
Worldwide, the revenues from these ‘bulge bracket’ banks are about $80bn, with the U.S. accounting for roughly half. The largest 50 firms generate more than 90% of the industry’s revenue. According to Dealogic, JP Morgan tops the global ranking table with nearly 10% market share, followed by Goldman Sachs and Bank of America Merrill Lynch.
Demand in this industry is driven by economic activity that results in equity launches, company mergers and acquisitions, or public financing. The profitability of a firm, however, depends on how accurately it can assess both the value of a business transaction and the readiness of the market to buy the attendant debt or equity.
The industry, which was traditionally known as merchant banking, experienced strong growth until 2008 when it was hit by the financial crisis. Several banks went bankrupt or had to be bailed out by governments. Investment banks were widely blamed for causing the crisis through excessive risk taking, leading to tighter regulation. As a result the industry suffered a decline of about 30% in revenues between 2009 and 2012.
The two main areas within the market are investment banking (IBD) and Markets. IBD advises the world's largest organizations on mergers and acquisitions (M&A), as well as a wide array of fund raising strategies. ‘Markets’ is further subdivided into equity capital markets and debt capital markets. In these markets the banks aim to earn dividends and capital gains for their clients as well as trading on the banks’ own behalf.
According to estimates published by International Financial Services London, since the economic crisis M&A accounts for about 30% of global investment banking revenue followed by debt capital markets, equity capital markets and syndicated loans. Goldman Sachs leads the big banks in global M&A revenues, with an about 15% share.
Regional Market Shares
The major share of global non-retail banking revenue is taken by the North American region. The U.S. plus Canada account for about 55% of worldwide revenue. M&A has been the key driver in the U.S., accounting for a share of about 45% of the country’s investment banking revenues followed by equity capital and debt capital markets revenues, which are slightly over 25% each. Lending accounts for the remaining share.
Due to increased regulation and a weak Eurozone economy, European and British banks are losing market share to global rivals. The entire European investment banks' share currently stands at about 25%. The share of UK-based investment banking peaked at 11% in 2005. New regulation, continued pressure on loan margins, concerns about risk costs, and difficulty placing loans in the secondary markets are expected to place further strain on Europe’s corporate banks.
For financial institutions that are refocusing their strategies post-crisis, there is a widespread agreement that Asia now represents the world’s most attractive corporate and investment banking market. Along with opportunity, however, the region reveals great complexity, due to differences in Asian countries’ stages of economic development, regulatory practices and business models.
Improving macroeconomic conditions, such as falling unemployment and a growing consumer spending, are expected to lead to improved industry revenues over the five years to 2020.
Expansion into foreign and emerging markets will be a key growth driver for the industry. Asia is likely to become the fastest-growing corporate and investment banking market globally. Against this background, investment banks are increasingly engaging in deals in emerging markets such as Brazil and China.
The sovereign debt crisis, a new wave of regulations and a more conservative attitude towards risk-taking are having a marked impact on corporate banking dynamics. In some countries there has been a backlash against the way that the banks are run and the high salaries and bonuses they pay. In the backdrop of tougher regulations, investment banks are very likely to downsize their trading desks in order to hold more capital in reserve as ‘buffer’, thus making trading activities less profitable. As a result balance sheets are expected to diminish by 10 to 15% in the medium term.
In order to cope with the impact of evolving regulations and maintain an acceptable level of profitability, these financial institutions will direct their attention to portfolio optimization, model and data quality improvements, financial efficiency and operational enhancements.
List of Associations
- Association for Financial Markets in Europe
- European Banking Federation
- London Investment Banking Association
- National Investment Banking Association
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