INVESTMENT BANKING AND CAPITAL MARKETS Market Report—Third Quarter 2004 Edition
New York, Frankfurt November 30, 2004
THE BOSTON CONSULTING GROUP
TABLE OF CONTENTS
Chapter
Page
Overview of Third Quarter 2004
2
Investment Banking Opportunities in China
10
Market Review •
Corporate Finance and Advisory
22
•
Fixed-Income Trading
29
•
Equity Trading
34
Data Definitions
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
40
-1-
Overview of Third Quarter 2004
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-2-
INVESTMENT-BANKING PROFITS DROPPED IN THE THIRD QUARTER 2004 Revenue Decreases In All Major Business Lines Investment-banking performance index decreased to its lowest level since the beginning of 2003 •
BCG’s industry index declined by 22.3 points to 76.6 from previous period
Declining revenues in equities and corporate finance worsened the impact of seasonally decreasing fixed-income trading revenues •
Equities trading revenues declined 12 percent from previous quarter suffering from low market volatility
•
Low deal volumes during the summer months resulted in 9 percent less revenues in corporate finance and advisory compared with the year earlier period
•
Fixed income revenues dropped 15 percent but were still higher than in the third quarter a year ago
As most banks started to position themselves for growth in equities and advisory in 2004, lower revenues also led to a decline in profitability •
Average industry profit margins dropped by 2.6 percent to 27.9 percent, for the first time below 30 percent since the second quarter 2003
Source: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-3-
BCG PERFORMANCE INDEX DECLINED SHARPLY
Index
BCG Investment Banking Performance Index 140 127.6 120 100.0
90.5
100 80.1 80
60.2
60
71.2
96.2
98.9 91.0
87.4
76.6
76.7
51.8
44.7 48.2
40 20
2001
2002
2003
2004
0 Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Note: The BCG IB performance index is calculated based on aggregate profits of 10 leading banks Source: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-4-
INVESTMENT-BANKING BUSINESSES DECREASED ACROSS BUSINESS LINES IN THIRD QUARTER 2004 Corporate Bond Origination $B
$B
150
M&A Advisory(1)
400 300
100 200
50
100
0
0
1Q/01 3Q/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04
Q1/01
$B 1200
U.S. Bond Trading(2)
Q3/01
Q3/02
Q1/03
Q3/03
Q1/04
Q3/04
Q3/03
Q1/04
Q3/04
Equity Trading
$Tr 10
1000
Q1/02
8
800
6
600 4
400 200
Asia
2
0
U.S.
0
Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04
Europe
Q1/01
Q3/01
Q1/02
Q3/02
Q1/03
(1) Announced transactions (2) Daily average trading volumes for treasuries, agencies, asset-/mortgage-backed securities (ABS/MBS), and corporate bonds Sources: Dealogic; SDC; FIBV; Federal Reserve Bank of New York; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-5-
INVESTMENT-BANKING REVENUES AND PROFIT MARGINS DROPPED Q3/04 vs. Q2/04
Pre-tax profit margin (%)
50%
Citi
Ø –2.6%
40%
BS
ML JPMC(1)
Q2/04 Ø: 30.5%
GS
30%
LB UBS
DB
Q3/04 Ø: 27.9%
MS
20%
Q3/04 Q2/04 10%
0% 0.5
CSFB
1.0
1.5
2.0
2.5
3.0
Ø –15.1%
3.5
4.0
4.5
5.0
Revenues ($B)
(1) JPMC only, not including Banc One Note: Ø calculated on a revenue-weighted basis; operating revenue for investment banking and institutional sales and trading Sources: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-6-
PROFIT MARGINS SIGNIFICANTLY LOWER THAN A YEAR AGO Q3/04 vs. Q3/03
Pre-tax profit margin (%)
50%
Citi 40%
ML
JPMC(1)
BS Q3/03 Ø: 33.6%
Ø –5.8%
MS LB
30%
UBS 20%
Q3/04 Ø: 27.9%
GS DB
Q3/04 CSFB
Q3/03
10%
0% 0.5
1.0
1.5
2.0
2.5
3.0
Ø +1.4%
3.5
4.0
4.5
5.0
Revenues ($B)
(1) JPMC only, not including Banc One Note: Ø calculated on a revenue-weighted basis; operating revenue for investment banking and institutional sales and trading Source: Company reports; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-7-
REVENUES DECLINED IN TRADING AND CORPORATE FINANCE/ADVISORY Corporate Finance/ Advisory Revenues Q3/04 vs. Q2/04
Trading Revenues Q3/04 vs. Q2/04 Trading revenue as percentage of total revenues Q3/04
90% 85%
40% CF&A revenue as percentage of total 35% revenues Q3/04
UBS
BS
DB
80%
LB
JPMC
CSFB
30%
GS
75%
GS
Ø: 75.0% ML
MS
25%
ML
Citi
70%
Citi
Ø: 24.5%
LB
CSFB
20% BS
65%
JPMC
60%
MS
DB
15%
UBS 55% 0.5
1.0
1.5
2.0
2.5
Ø –14.3%
3.0
3.5
Revenues ($B)
4.0
3Q/04 2Q/04
10% 0.2
0.4
0.6
0.8
Ø – 8.6%
1.0
1.2
Revenues ($B)
Note: Trading and corporate finance revenues do not total 100% because of “other” revenue Sources: Company reports; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-8-
A LACK OF TRADING OPPORTUNITIES LED TO A DECREASE IN MARKET RISK
Market Risk VAR ($M)
900 800
728
700
768
661
627
662
569
600
495
496
485
493
511
500 400
Total
% change Q3/04 vs. Q1/02
BS
-12.0
ML
-21.8
LB
+32.7
CSFB
-18.6
MS
+90.2
JPMC(1)
300 200 100 0 Q1/02
Q2/02
Q3/02
Q4/02
Q1/03
Q2/03
Q3/03
Q4/03
Q1/04
Q2/04
-4.0
GS
+14.3
DB
+121.2
UBS(1)
+79.5
Citi
+67.6
Q3/04
(1): UBS and JPMC have revised market-risk calculation methodology in Q3/04 Note: VAR at 99% confidence/one-day intervals for interest rate, currency, commodities price risk; differently reported VARs converted assuming normal distribution of risk Source: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-9-
Investment Banking Opportunities in China
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-10-
INVESTMENT BANKS HAVE HIGH EXPECTATIONS IN CHINA Long-Term Commitment Required To Reap Profits Chinese investment banking has enjoyed strong growth during the past three years. Further opportunities exist, particularly in equities underwriting • Chinese IPOs accounted for almost 10 percent of global IPO volume in 2004, down from 14 percent in 2003 • IPO pipeline remains strong—value of announced IPOs totals roughly $10 billion over the next 12 months However, so far only a few foreign players have translated their expectations into meaningful revenues • Foreign banks remain restricted despite the Chinese government’s recent deregulation efforts • Chinese investment-banking fees are below international standards • Domestic bond market is still in early development stage • Long sales cycle requires significant involvement of senior bankers Several lessons can be learned from successful players • A long-term strategy and commitment to China are required • “Guanxi” (friendship) relationships with senior officials are essential • Private equity investments provide lucrative gains and secure future investment-banking mandates • Market insiders consider industry knowledge and local relationships as key success factors Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-11-
CHINA ACCOUNTS FOR 10 PERCENT OF THE GLOBAL IPO MARKET 2004 YTD IPO Market
$141B
Europe/ Middle East
36
$39B
6 Asia-Pacific
Americas
39
3 4 12
Japan
14
China
66
Note: Chinese IPOs include Chinese domestic A-share issues. China also includes Hong Kong; 2004 Year-to-date November 4 Source: Dealogic Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
Rest of AsiaPacific India Australia
-12-
CHINESE IPO PIPELINE REMAINS STRONG...
Sector
Company name
Listing market
IPO date planned
IPO value
Airlines Auto Banking Banking Banking Banking Banking Chemical Coal and Mining Energy Energy Energy Healthcare Industrial Industrial Infrastructure Insurance Media Media Property Securities Securities Securities
Air China Dongfeng Motor Corp. Bank of China Bank of Communications China Construction Bank China Minsheng Banking Corp Nanjing City Commercial Bank Hongda Shenhua Group Datang Power Huadian Power Shenzhen Energy Group Shanghai Pharmaceutical Grandtour Tyres Kunming Iron and Steel Group Sichuan Expressway China Pacific Insurance Beijing Youth Daily Shenzhen Press Group Beijing North Star China Everbright Securities Guotai Junan Securities Haitong Securities
Hong Kong & London Hong Kong Hong Kong & Shanghai Hong Kong & Shanghai Hong Kong & New York Hong Kong Shanghai Hong Kong Hong Kong & Shanghai Shanghai Shanghai Hong Kong Overseas Hong Kong Hong Kong Shanghai Shanghai Hong Kong Hong Kong Shanghai Shanghai Shanghai Shanghai
2005 Q4 2004 2005 2005 2005 Q4 2004 Q4 2004 N.A. Q4 2004 2005 In plan Q4 2004 2H 2005 Q4 2004 2005 2005 Nov 2004 Q4 2004 In plan Q4 2004 N.A. N.A. N.A.
U.S.$0.5 billion U.S.$0.6 billion N.A. U.S.$2 billion U.S.$3 -5 billion U.S.$1 billion N.A. N.A. U.S.$1.5 billion RMB 6 billion RMB 2 billion U.S.$0.5 billion U.S.$0.5 billion U.S.$0.4 billion U.S.$0.25 billion N.A. N.A. U.S.$0.13 billion U.S.$0.13 billion RMB 4 billion RMB1.9 billion N.A. N.A.
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-13-
...BUT MARKET POTENTIAL HAS TRANSLATED INTO RELATIVELY LOW REVENUE POOLS DCM Revenues
ECM Revenues $M
500
$M
462
DCM Revenues
400
400 300
203 200
500
300
248
200
140
100
100
0
0 2001
2002
2003
2004YTD
M&A Advisory Fees
48
32
2001
2002
89
84
2003
2004YTD
500
$M 400 300 200 100
80
85
2001
2002
122
115
2003
2004YTD
0
Note: Market revenues estimated based on deal volumes, 2004YTD as of November 04, 2004 Source: Dealogic Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-14-
INVESTMENT BANKS FACE SEVERAL CHALLENGES IN CHINA Challenge
Limited domestic access
Low fee levels
Nascent market
Description
Impact
• No majority ownership allowed in Chinese brokers • Foreign investment banks are prevented from trading domestic Chinese A-shares
Players can only participate in the domestic market via a minority partnership with a Chinese securities firm
• Chinese consider underwriting business low risk • Strong competition for each mandate, given limited supply of accessible deals
Price levels lower than in developed markets
• Political decisions have a major impact on the market
Markets remain fragile and uncertain
• Often only 25 percent free float • Inadequate market transparency • Weak corporate governance
Reputation risk for investment bank
Source: Company financial reports; BCG analysis and forecasts Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-15-
IN CHINA, FEE LEVELS ARE AFFECTED BY THE PERCEPTION THAT THE UNDERWRITING BUSINESS BEARS LITTLE RISK
Chinese beliefs about securities underwriting...
Every issue will be over-subscribed
No underwriting risk
Every issue will generate significant press coverage
No value from distribution
No company will fail
Source: Dealogic, BCG estimates Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
No reputation risk
...lead to low fee levels
China
Global Average
Equity IPO
1.5-3.85%
4.6%
Bond issuance
0.1-0.4%
0.5%
M&A
Low By case
~1%
-16-
CHINA IS GRADUALLY OPENING DOMESTIC CAPITAL MARKETS TO FOREIGN INVESTORS Experimental QFII(1) Scheme Allows Foreigners to Invest in Chinese Securities The QFII scheme was introduced in December 2002 Investment Instruments Domestic A-shares listed on Chinese stock exchanges(2) (excluding B shares) Treasuries listed in China Convertible bonds and enterprise bonds listed on Chinese exchanges Other financial instruments as approved by securities regulator CSRC Investment Restrictions A single QFII can hold a maximum stake of 10 percent in a listed company Collectively, QFIIs can hold no more than 20 percent of a single company Investors are precluded from remitting funds for one year after their initial investment. For investments in closed-end funds, the restriction is extended to three years For each QFII, the minimum amount is $50M while the maximum should not exceed $800M
A total of 21 QFIIs invested $3 billion
Investment Quota ($M) UBS Citigroup Morgan Stanley Deutsche Bank Nikko Bill & Melinda Gates Foundation HSBC ING ABN Amro Bank Barclays BNP Paribas Lehman Brothers Merrill Lynch Standard Chartered Seven other investors Total
800 400 300 200 200 100 100 100 75 75 75 75 75 75 350 3,000
(1) (2)
Qualified Foreign Institutional Investors The QFIIs cannot invest in 15 A-share companies in industries such as media production, cable TV, pharmaceuticals, publishing, power transmission, publishing, and securities, etc. Source: China Securities Regulatory Commission (CSRC) – as of October 31, 2004, press search Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-17-
SUCCESSFUL PLAYERS OFFER KEY LESSONS
A long-term strategy and commitment to China are important • Building business and political relationships take time, especially in China • Banks that are currently successful started building relationships in the early 1990s Joint ventures with local banks are a strategic option for participating in the Chinese market • Morgan Stanley formed the first international investment bank CICC(1) together with China Construction Bank in 1995 • More recently other foreign banks were allowed to form joint ventures with Chinese banks, e.g., CLSA, BNP Paribas • In August 2004, Goldman Sachs established a new joint venture run by well-known Chinese investment banker Fang Fenglei Private equity investments provide lucrative gains and secure future investment-banking mandates • Morgan Stanley and Goldman Sachs have recently earned significant profits from private equity investments made in the early 1990s
(1)
China International Capital Corporation
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-18-
TWO EXAMPLES HIGHLIGHT DIFFERENT JV APPROACHES TO ENTERING THE CHINESE INVESTMENT-BANKING MARKET CICC(1) (Morgan Stanley) Joint venture between Morgan Stanley (35%), China Construction Bank (42.5%), and others(2) formed in 1995 Cultural and managerial differences led to a rocky start 4 different chief executives in less than 3 years Started to secure large underwriting deals in 2000 Top earning China brokerage in 2002 Top underwriter in China in 2003 Top underwriter of Chinese offshore IPOs in 2001-03 Strong political backing Currently led by Levin Zhu Yunlai, son of former Chinese premier Zhu Rongji Morgan Stanley already recouped initial $35 million equity investment
Challenge to retain control
Gao Hua (Goldman Sachs) Joint venture between Goldman Sachs (33%) and Fang Fenglei (CICC founding banker), his friends and owner of Lenovo Group(3) (67%) Approved in August 2004 Company inherited operating license of failed Hainan Securities after Goldman Sachs paid $62 million to bail out the insolvent Chinese brokerage Joint venture includes a buyout clause(4) that allows Goldman Sachs to buy out its Chinese partners and assume total control of Gao Hua Plans to build a firm that mimics Goldman Sachs’ offices—down to the same computer systems, furniture, wallpaper, and carpeting
Success remains to be seen
(1) China International Capital Corporation (2) Others include China National Investment and Guaranty Corp, GIC of Singapore, and Mingly Corp, each with 7.5% stake (3) Lenovo Group, formerly known as Legend Group, is China's largest computer marker (4) The buyout clause is conditional on China’s decision to allow foreign majority ownership Source: Literature search, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-19-
PRIVATE EQUITY INVESTMENTS PROVIDE LUCRATIVE GAINS AND SECURE ACCESS TO I-BANKING DEALS Stakes in Ping An (%)
Generating >1,000% ROI over 10 Years(2)
7%(1)
6.87%
5.31%
7%(1)
5.87%
4.53%
$M
$M 600
477
Beijing gave GS & MS special permission to invest in Ping An
1994
Dai-Ichi Mutual acquired 1% stake from GS and MS
Stakes diluted after IPO
2003
600
401 400
400
200
200
40
IPO June 2004
....
517
40
0
Post-IPO
441
0 Purchase price
Gain
Market price
Purchase price
Gain
Market price
"This has been one of our most successful investments anywhere in the world" - Henry Cornell, Senior Managing Director, Goldman Sachs (1) Market estimates (2) Gain calculated based on maximum offer price of HK$11.88 per share in IPO Source: Company data, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-20-
INDUSTRY KNOWLEDGE AND LOCAL RELATIONSHIPS ARE CONSIDERED KEY SUCCESS FACTORS “Understanding of CSRC legal and accounting regulations are the basics. Knowing the rules of the game is absolutely necessary, but does not give you a competitive edge. The real difference is industry- and client-specific knowledge, which can add value to client strategy, financing, and operation, and make your client win” - Chinese I-banker
“We went to another listed company in our province that is underwritten by her [I-banker] and had a long chat with them on her capability. We also talked to the provincial securities committee to check her track record. It is actually a very small world, and word spread very fast” - Chinese I-banking client
Note: China Securities Regulatory Commission Source: BCG interviews Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-21-
Market Review Corporate Finance and Advisory
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-22-
UNDERWRITING AND ADVISORY DEAL VOLUMES SLOWED IN THIRD QUARTER 2004 After a strong start in 2004, corporate finance and advisory volumes have slowed in the third quarter. Deal volumes in equities, debt, and advisory businesses declined •
Global equity origination decreased by 4 percent from the previous quarter, but is still significantly higher than a year ago
•
Announced M&A advisory volumes decreased 3 percent during the summer, but also ended significantly higher than 12 months ago
•
Bond—especially corporate bond—underwriting volumes slowed, as rising interest rates in the U.S. curbed refinancing activities of previous quarters
Analysis of the first nine months of this year reveals a successful year for several firms •
Goldman Sachs remains the pre-eminent M&A advisory house in 2004, although Morgan Stanley has closed the gap
•
Morgan Stanley won significant market share in equities underwriting, and leads the deal rankings in Europe and the U.S.
•
UBS was successful in European bond underwriting, winning the No. 1 spot from Deutsche Bank for the first nine months of this year
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-23-
M&A M&A and and Equity Equity Origination Origination
EQUITY CAPITAL MARKETS AND ADVISORY BUSINESS DECLINED
Equity Capital Markets
504
140
500 402
104
100
400
38 38
74
80
40
53
114
120
60
Announced M&A Deals
$B 600
$B 160
59
13
11 31
15
24
13
20 24
30
21
59 49
45
17
38
39
10
8
7 10
17
15 15
17
27
22
329 80
247
22
33
37 28
20
58
300
200
25
283
38
34
33
0
108 Global
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Asia
48
275
277
277
42
60
42
69
149
100
39
305
103
133
106
22 39
22
83
138
383
372
87
85
169
157
127
130
57
154 96
164
95
124
122
111
295 214
131
156
0 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
U.S. Europe
Sources: Dealogic; SDC; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-24-
M&A M&A and and Equity Equity Origination Origination
IN M&A, MORGAN STANLEY WON SHARE FROM GOLDMAN SACHS
European M&A
U.S. M&A Relative market position 9M/04
100%
Gained share
GS
Relative market position 9M/04
Gained share
100%
Rothschild 80%
80%
ML
BNP JPMC
GS
MS
MS 60%
60%
Lazard BoA 40%
Citi LB ML
JPMC Lazard
40%
CSFB UBS
ABN 20%
20%
SG DB BNP HSBC 0% 0% 20%
BS
HSBC LB Cazenove Greenhill
Lost share 0%
40%
60%
80%
100%
Relative market position 9M/03
UBS DB CSFB
0%
20%
Citi
Calyon 40%
60%
Lost share 80%
100%
Relative market position 9M/03
Notes:
Based on date effective relative to market leader JPMC volumes include Bank One Sources: Dealogic; SDC; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-25-
Equity Equity and and Fixed-Income Fixed-Income Origination Origination
IN EQUITY UNDERWRITING, MORGAN STANLEY CLAIMED LEAD FROM GOLDMAN SACHS
European Equity Capital Markets
U.S. Equity Capital Markets Relative market position 9M/04
Gained share
100%
MS GS
Relative market position 9M/04
Gained share
100%
MS
UBS
80%
80%
GS Citi
DB ML
Citi
60%
60%
JPMC CSFB
DB BS
20%
BoA
Wachovia
Lost share
SG
0% 0%
0%
20%
40%
60%
SG
40%
UBS 20%
JPMC ABN
ML LB
40%
LB
80%
100%
Relative marketposition 9M/03
BNP
CSFB Calyon DKW Cazenove
Lost share
HSBC ING 0%
20%
40%
60%
80%
100%
Relative marketposition 9M/03
Notes:
Share relative to market leader JPMC volumes include Bank One Sources: Dealogic; SDC; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-26-
Fixed-Income Fixed-Income Origination Origination
RISING RATES AFFECTED BOND ORIGINATION
All Bonds
$B 1,500
Corporate Bonds
$B 300
1322 1160
140
1,250
1029
88
57
1,000
844 43 750
500
780 66
568
663 56
711
716 61
896
887
68
82
640 560
493 437
170
181
200
77
171
164 150
18
28
22
578
128
162
167
18
26
115
511
100
93
90
89
22
86
80
78
18
154 25
141 26
195
332
440 268
294
418
50
376
74
54 56
43 53
63 28
38
122 23
55 471
221
545
28
460
250 233
1047 1031 84
632
239
250
63
83
64
63
55
62
43
0
0
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Global Asia Note: Corporate bonds for industrial issuers only Source: Dealogic; SDC; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
U.S. Europe -27-
Fixed-Income Fixed-Income Origination Origination
DEUTSCHE BANK LOST ITS DOMINANCE IN EUROPEAN FIXED INCOME ORIGINATION
European Bonds Underwriting
U.S. Bond Underwriting Relative market position 9M/04
100%
Gained share
Citi LB
80%
60%
40%
Gained share
100%
Citi
HSBC Barclays ABN MS JPMC BNP
JPMC
BoA BS DB GS UBS CSFB
DB
UBS CSFB
80%
MS
ML
Relative market position 9M/04
60%
SG LB 40%
GS
DKW ML
Calyon Wachovia Barclays HSBC BNP Nomura 0% 0% 20% 40%
20%
20%
Lost share 0% 60%
80%
100%
Relative market position 9M/03
Coba BoA ING 0%
Nomura
20%
Lost share 40%
60%
80%
100%
Relative market position 9M/03
Notes:
Relative to market leader JPMC volumes include Bank One Source: Dealogic; SDC; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-28-
Market Review: Fixed-Income Trading
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-29-
Fixed-Income Fixed-Income Trading Trading
BANKS’ FIXED-INCOME REVENUES DECLINED SEASONALLY IN THIRD QUARTER 2004 Banks’ fixed-income trading revenues declined seasonally in third quarter 2004 •
Steep yield curve flattened sharply, although expectedly
•
While bond-trading revenues declined, they still exceeded last year’s levels, and it appears that 2004 could become a record year for fixed income
Market-risk levels declined slightly, while risk efficiency in fixed income remained unchanged •
Overall market-risk levels decreased by 4 percent from previous period, partially because several banks reclassified fixed-income instruments in their market-risk calculations
•
However, average risk efficiency, as defined by trading revenues at a given risk level, has remained unchanged—resulting in lower trading revenues
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-30-
Fixed-Income Fixed-Income Trading Trading
YIELD CURVE DROPPED SHARPLY
10-year/2-year U.S. Treasury Yield Spread Basis points
300 250 200 150 100 50 0 -50 -100 Jan-97
Source: Bloomberg Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
Jan-98
Jan-99
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
-31-
Fixed-Income Fixed-Income Trading Trading
FIXED-INCOME REVENUES DECLINED SEASONALLY But Third Quarter Levels Still Exceed Previous Years’ Levels U.S. Daily Average Bond-Trading Volumes $B 1,000 869 756
800
667 104
600
685 116
124
149
148
914 803
144
140 230
188
920
206
120 166
133
789
909
216
212
954 151
205
Fixed-Income Trading Revenues by Quarter 919
Index
144
150
156
130
124
125
200
137
91
88
100
105
102
100 80
165
206
129
75
75
400
430
200
428
474
477
457
530
556
498
558
598
50
563
25
0
0
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04
Total Corp. Bonds Note:
Daily average trading volumes with inter/dealer brokers and others; aggregated trading revenues for 10 leading investment banks surveyed Sources: Federal Reserve Bank of New York; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
MBS/ABS Treasury/ Agencies -32-
Fixed-Income Fixed-Income Trading Trading
FIXED-INCOME MARKET HAS DECLINED SLIGHTLY Risk Efficiency Remained Unchanged
Fixed-Income Market Risk(1)
Risk Efficiency Q3/04 Ø Q2/04: 17.7x Rev/VAR
1000
884
VAR ($M)
802 745
800
665 581 600 90 79 400
555 71
597 580 66 83
59 88
95
77 137
662 74
412
115
78
101
779
118
119
111
GS
1,500
LB
106
378
448
433
461
494
563
595
Q3/02
ML
1,000
665
Q3/03
Q1/04
(1) Aggregated levels for the 10 players on the right graph Note: VAR at 99% confidence/one-day intervals for interest rate, currency, commodities price risk; differently reported VARs converted assuming normal distribution of risk Sources: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
UBS
JPMC
BS
575
Q3/04
MS
CSFB
500
Q1/03
Citi
DB
0 Q1/02
Broker
85
94
109
588 200
67
784
2,500 Fixedincome trading revenues 2,000 ($M)
Ø Q3/04: 17.0x Rev/VAR
average all players Q2/04
Trader
0
Total VAR Commodities Foreign exchange
0
25
50
75
100
125
150
Average VAR ($M)
Interest rate -33-
Market Review Equity Trading
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-34-
Equity Equity Trading Trading
DECLINING TRADING VOLUMES AND LOW VOLATILITY AFFECTED EQUITIES TRADING BUSINESS A difficult quarter for equities trading resulted in lower revenues than in the first two quarters of 2004 •
Equities trading revenues for the leading players declined by 29 percent on average from the first quarter of the year
Several factors contributed to the slowdown •
Equities trading volumes at global stock exchanges declined by 17 percent from first quarter 2004
•
Market volatility has been declining steadily since beginning of 2003. The market volatility index (VIX) decreased 27 percent since beginning of 2004
•
A lack of trading opportunities left lower value-at-risk in equities, generating lower revenues compared with the two preceding quarters
UBS, Goldman Sachs and Morgan Stanley led banks in equities trading in the third quarter, measured by revenues
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-35-
Equity Equity Trading Trading
EQUITIES MARKET VOLATILITY REACHED LOWEST LEVELS SINCE 2000
Market Volatility Index (VIX) 60
Percentage change 100%
Index
80%
50
60% 40%
40
20% 0%
30
-20% 20
-7% -27%
-40%
-41%
-60%
10
-80% -100%
0 J Q1/01 A J Q3/01 O J Q1/02 A J Q3/02 O J Q1/03 A J
O J Q1/04 A J Q3/04 O Q3/03
Q3/04 vs. 2Q04
Q3/04 YTD
Q3/04 vs. Q3/03
Source: Bloomberg Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-36-
Equity Equity Trading Trading
STOCK PRICES DECLINED SLIGHTLY IN THIRD QUARTER
Development of Main Equity Indices
Percentage change 50%
120
Index 100
30%
S&P 500 Nikkei 225
80
10%
3%
FTSE E300
60
-10% 40
0%
1%
-1% -2% -9%
-30%
20
-50%
0 J Q1/01 A
J Q3/01 O J
Change Q3/04 vs. Q2/04
A J Q3/02 O J Q1/03 A J Q3/03 O J Q1/04 A J Q3/04 Q1/02
Change Q3/04 YTD
Nikkei 225 S&P 500 (1) Indexed Source: Thomson Financial Datastream Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
FTSE E300 -37-
Equity Equity Trading Trading
EQUITY TRADING REVENUES DECREASED FURTHER
Equity Trading Revenue by Quarter (Indexed)
Global Exchange Trading Volumes 140
14 $Tr 12
120
11.0
10 8
126
%
8.5
8.6
1.0
1.0
7.6 0.8
8.1 7.4 0.8
6 5.1
4.9
4 2 2.4
2.7
4.4
2.4
4.3
2.3
6.8
1.1
8.6 1.4
9.1
2.2
9.7 1.8
1.6
0.8
3.8
1.9
100 100
9.1
4.5
4.6
4.7
100 90
101
98
87
89
81
1.4
80
5.5 4.5
107
104
60 4.7
40
2.5
2.6
2.8
3.6
3.4
20
3.0
0
0 Q1/02
Q3/02
Q1/03
Q3/03
Q1/04
Q3/04
Global
Q1/02
Q3/02
Q1/03
Q3/03
Q1/04
Q3/04
Asia U.S. Europe Note: Single counted, includes investment funds traded at exchanges; aggregated trading revenues for 10 leading investment banks surveyed Sources: FIBV; BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-38-
Equity Equity Trading Trading
UBS HAD HIGHEST EQUITIES TRADING REVENUES IN THIRD QUARTER Average Risk Efficiency Decreased Slightly Equities Market Risk(1)
Risk Efficiency Q3/04 1,200 Equity trading 1,100 revenues 1,000 ($M)
VAR 400 ($M) 350
309
300 250
Ø Q2/04: 23.3 Rev/VAR
231 203
214 191
200
185
257
MS GS
800 700
230
ML
600
185
CSFB
500
150
400
100
300
Ø Q3/04: 22.7x Rev/VAR
UBS
900
284
270
Broker
Citi
DB
JPMC BS
LB
200 50
Trader
100
0
0 Q1/02
Q3/02
Q1/03
Q3/03
Q1/04
Q3/04
0
10
(1) Aggregated market-risk levels for the 10 players on the right Note: VAR at 99% confidence/one-day intervals; differently reported VARs converted assuming normal distribution of risk Sources: Company reports, BCG analysis Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
20
30
40
50
Average VAR ($M)
-39-
Data Definitions
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-40-
DATA DEFINITION OVERVIEW
Regional deal allocation is based on issuer’s country (parent issuer’s country, where available). M&A deals are allocated by target nation Dealogic was used for European capital market data, Thomson SDC for U.S. and Asian data Relative market shares are based on bookrunner league tables Equity origination data include common stock IPOs and secondary issues only Bond origination data contain all convertible and nonconvertible bonds, including ABS, MBS, municipals, agency, and corporate bonds Corporate bonds are limited to industrials and utilities excluding financial services issuers Equity trading data reflect institutional block trades as advertised in AutEx BlockDATA The second quarter ended on August 31, 2004, for Bear Stearns, Goldman Sachs, Lehman Brothers, and Morgan Stanley; all others ended on September 30, 2004
Q3 2004 Market Report-BR-TM-NYC-30Nov04.ppt
-41-
