Contact Information: Contact: Eric Gregoire + 1 617-850-3783
Recent Performance of Investment Banks Sets the Stage for a Challenging Year
Midterm Recovery Seen for Markets in North America and Europe; Strong Growth Expected to Continue in Latin America, the Middle East, and Asia-Pacific
| Source: The Boston Consulting Group (BCG)
NEW YORK, NY--(Marketwire - March 10, 2008) - A difficult fourth quarter capped a
challenging year for investment banks. Pre-tax profit margins of leading
banks fell 30 percentage points in 2007, and revenues declined by 32
percent, according to The Boston Consulting Group's latest quarterly
"Investment Banking and Capital Markets" report.
Write-downs stemming from the subprime crisis slashed investment banks'
fixed-income revenues by about $100 billion in 2007. Trading revenues of
ten leading players declined by about 46 percent, from $140 billion to $75
billion. Their corporate finance and advisory revenues were resilient,
however, and increased by 19 percent for the year.
"The crisis will continue to cast a shadow over the industry in the near
term," said Achim Schwetlick, one of the leaders of BCG's investment
banking practice and coauthor of the report. "The industry's growth rate
should rebound after 2008, but this will depend largely on the return of
both liquidity and investor confidence."
Equities hold the greatest promise for growth in the near term, while
growth rates for all products should reach high single digits over the next
three to four years. The recovery will vary by region. "Emerging markets
were largely unaffected by the problems that radiated from the U.S.
mortgage market," noted Ranu Dayal, another of the report's authors.
"Markets in Latin America, the Middle East, and Asia-Pacific, excluding
Japan, should maintain strong growth." Despite their exposure to the
crisis, North America and Europe will remain the dominant revenue pools for
investment banks.
The industry's performance in 2007 was the story of two halves. BCG's
Investment Banking Performance Index, which tracks the profits of ten
leading investment banks, reached new heights in the first quarter before
falling slightly in the second quarter. In the third quarter, revenues from
fixed-income activities dropped by a staggering 93 percent. The index
plunged, and the free fall continued into the fourth quarter.
The severity of the crisis intensified in the fourth quarter. Fixed-income
and equity-trading revenues, in particular, fell by about 300 percent as a
result of subprime-related write-downs. For the year, some players incurred
losses that eclipsed their entire profits from 2006. There were, however,
signs that other parts of the business were not only intact but healthy.
Equity-trading revenues increased by about 26 percent over the previous
quarter, and were 24 percent higher than they were during the same period
in 2006.
Other activities were also insulated from the crisis. Corporate finance and
advisory revenues grew by about 24 percent in the fourth quarter, owing to
a strong backlog of M&A deals. The value of M&A deals increased by 35
percent in the fourth quarter and was about 20 percent higher than it was
during the same period in 2006. In addition, equity origination increased
by nearly 48 percent in the fourth quarter.
The report from BCG provides a brief overview of the root causes of the
crisis, beginning with a global surplus of capital and easy access to
credit, and culminating with the explosive growth of securitization
activity and a dangerous lack of clarity about the risk acquired by banks.
It also pinpoints the traits of players that were able to weather the
storm. Banks with strong risk-management functions and cultures were
careful to hedge their exposure. Diversified banks -- particularly those
with a strong presence in emerging markets -- also fared better.
The crisis is still unfolding, but lessons are already being drawn from the
missteps that set it in motion. Securitization is seen as one of the main
causes. The report shows that the logic for securitization remains both
clear and compelling. However, certain structural issues, such as
inadequate credit and price discipline, must be resolved to ensure a return
to normalcy.
To receive a copy of the report or schedule an interview with one of the
authors, please contact Eric Gregoire at + 1 617-850-3783 or
gregoire.eric@bcg.com.
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