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.