Investment banking: US equities drive boom in Q1 IB revenues

When Goldman Sachs reported its first-quarter earnings on April 16, the firm revealed a 36% rise in net investment banking revenues year on year to $1.57 billion. This result is not only an impressive achievement for the firm but also a reflection of its extraordinary run in US fixed income this year. The figures include underwriting revenues of €1 billion – a 63% jump from the first quarter of 2012 partly thanks to the flows that have taken place in US leveraged finance and commercial mortgage backed securitization.

According to Dealogic, this pushes the firm from ranking number six in global investment banking revenue for the first quarter of 2012 to third this year, behind only JPMorgan and Bank of America. “We are number one in terms of disclosed revenues for the first quarter of this year,” claims Richard Gnodde, co-chief executive of Goldman Sachs International and global co-head of the investment banking division. “Market shares across all core products are very strong and we have made significant strides on the debt side.” However, these results offset a 7% drop in FICC trading revenues and a 15% drop in equity trading revenues at Goldman for the quarter. For the whole market global investment banking revenues were $17.3 billion in the first quarter, up 2% year on year, but down 11% on the last quarter of 2012. US high-yield bonds worth €90 billion were issued in the first quarter (leveraged loan volumes hit a quarterly record of $286.6 billion) and by mid-April there had been $30.3 billion in new CMBS issuance to date. The largest increase in revenue year on year was in syndicated loans – up 28% to $3.8 billion thanks to the US boom in leveraged lending. US clients accounted for 49% of global investment banking revenue in the first quarter – the highest percentage since 2002.

Financial institutions continued to lead investment banking revenues in spite of a 17% fall in revenues. The US, Canada and Japan provided the bulk of those financial institutions raising capital. Consumer, real estate and media all saw increases to investment banking revenues of more than 50% year on year. Technology, energy and industrials each declined.

Gnodde partly attributes Goldman’s first-quarter results to the bank’s strength in equity markets. “The equity market had a huge turnaround in the first quarter of this year, coming back in a significant way,” he says. “Our equity underwriting business has taken advantage of these conditions, with volumes almost doubling globally and up almost 80% in Europe.” Goldman ranks number one for completed M&A and worldwide equity and equity-related offerings for the quarter. According to Dealogic, global ECM investment banking revenues rose 3% to $3.8 billion, 22% of total revenues. M&A revenues dropped 14% year on year to $3.6 billion.

Barclays, Bank of America Merrill Lynch and Morgan Stanley all reported first-quarter investment banking revenue increases in the mid- to high-twenties percent, according to Dealogic.

“Our global equities business has had a very strong first quarter, especially our US equities team, which has performed particularly well. Barclays is number one in US IPOs for the first quarter,” says John Langley, co-head of global finance and risk solutions at Barclays. “It’s also very encouraging to see that we are now really starting to hit our stride in terms of high profile mandates in Europe and Asia.”

Revenues at RBC, HSBC and BNP Paribas all fell year on year, while number-one ranked JPMorgan’s revenues rose 8.2%, from €1.3 billion to €1.4 billion.

Debt capital markets accounted for 36% of the $17.3 billion of total investment banking revenues at $6.2 billion, but up just 1% year on year. Goldman Sachs nevertheless reported record debt underwriting revenues in the first quarter – up 17% over the quarter to $694 million. “There is definitely a sectoral shift happening,” David Solomon, co-head of global investment banking at Goldman Sachs, tells Euromoney. “Corporate funding was carried out by the European banks, but now they are less likely to be a lender to European corporations. That means European corporates will turn more to capital markets – more similar to the US model. That’s going to be a significant opportunity for us and we are invested in that. For now it’s too early to see that turning into revenues, but over the medium term it will.”

Goldman’s strong performance in Europe saw net investment banking revenues grow from €183 million to €281 million, according to Dealogic. This 53% increase means Goldman displaces JPMorgan as number two in Europe behind Deutsche Bank. Gnodde tells Euromoney that its investment in European DCM has enabled it to effectively challenge the established players. “Corporate lending continues to be very important in Europe, with European banks continuing to run large corporate lending books, which feed into their DCM businesses,” he says. “But we have made a big push in building our DCM presence in Europe on the underwriting side and now rank number six in investment-grade underwriting for European clients.” The firm has particularly focused on building its euro presence on the investment-grade underwriting side in the region.