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Big i-banks owe debt of gratitude to lower rates


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Big i-banks owe debt of gratitude to lower rates

Some of the largest U.S. investment banks were able to gain market share and boost their total advisory and underwriting revenue during a typically slow dealmaking period.

Deal activity tends to dip during the summer months, but total investment banking revenue increased 1.2% quarter over quarter and 3.9% year over year to $8.11 billion for Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. The year-over-year growth was driven by debt underwriting, which was up 10.5% to $3.65 billion, as advisory revenue was down 1.2% to $2.50 billion, and equity underwriting was down 0.2% to $1.86 billion.

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Going forward, the prospect of lower rates should buoy the debt underwriting and advisory businesses, as favorable financing costs can entice companies to issue paper and pursue M&A. During earnings conference calls, analysts asked questions about whether the global economic growth slowdown could hurt M&A, but Goldman Sachs CFO Stephen Scherr sounded optimistic about advisory revenue going forward.

"The ingredients for continued M&A activity remains solid," he said, according to a transcript of an earnings conference call. "Client dialogues are healthy. Financing markets are open."

In the third quarter, Goldman Sachs was a laggard among its peers, having seen its investment banking revenue fall 14.8% year over year and 9.4% sequentially to $1.69 billion. The company was the only one among the five largest i-banks to post a year-over-year decline in debt underwriting revenue, recording a 7.3% drop to $586 million. Goldman Sachs also reported the largest year-over-year drop in advisory revenue with a 21.8% decline to $716 million.

However, Goldman Sachs could soon find better results. In its earnings release, the company noted that advisory and debt underwriting business boosted its deal backlog quarter over quarter. This was the first time Goldman Sachs reported a sequential backlog increase since the company reported second-quarter 2018 results.

While Goldman Sachs hopes to find growth soon, its peers were able to tout how recent i-banking expansion efforts helped improve wallet and market share in the third quarter.

BofA CFO Paul Donofrio said his company demonstrated strength in the advisory and credit underwriting business, which helped total investment banking revenue increase 25.8% year over year and 10.3% quarter over quarter to $1.58 billion. "We continued to add regional investment bankers with a focus on expanding our geographic coverage in the U.S. to match our coverage model and market leadership in commercial banking across the U.S.," Donofrio said, according to a transcript.

The effort has helped increase middle-market coverage, which can provide some stability to revenue as investment banking business becomes less reliant on large deals, Chairman and CEO Brian Moynihan said. He noted that the volume of deals can increase when i-banks attempt to serve the 5,000 to 10,000 companies in the middle market rather than just focusing on the largest 1,000 companies.

International business helped boost Citigroup's third-quarter investment banking revenue, which increased 4.0% year over year to $1.23 billion. The company's CFO Mark Mason noted that Citigroup saw particular strength in Europe, the Middle East and Africa. Citigroup CEO Michael Corbat said hiring efforts have helped make the EMEA region one of Citigroup's top performers.

"You've seen over the last three or four years, some pretty consistent market share gains for us there," Corbat said according to a transcript.

Mason added that Citigroup has seen increased wallet share in a number of sectors, including in technology, health care and consumer. From a product standpoint Citigroup's debt underwriting increased 6.8% year over year to $705 million in the third quarter, and advisory revenue was up 5.3% to $276 million over the same time period. Those businesses helped offset a drop in Citigroup's equity underwriting revenue, which decreased 4.6% to $247 million.

The third quarter proved challenging for many in equity underwriting as several large IPOs faced difficulties coming to market. JPMorgan was able to buck the trend as its equity underwriting increased 22.4% year over year and 1.8% quarter over quarter to $514 million in the third quarter. CFO Jennifer Piepszak said IPOs and convertible offerings boosted equity capital markets activity and said the company showed strength in the middle market and in the technology and health care sectors.

"We continue to gain wallet share, driven by our strategic investments," Piepszak said according to a transcript.

JPMorgan's total third-quarter investment banking revenue was up 8.7% year over year and 7.3% sequentially, but Piepszak said the company is expecting the revenue will decline in the fourth quarter when compared to the strong third-quarter and prior-year performances.

Still, Piepszak said JPMorgan's pipelines remain healthy. "Strategic dialogue with clients is constructive, equity markets remain receptive to new issuance and the lower rate environment has made debt issuance more attractive," she said.

Higher debt underwriting business helped Morgan Stanley grow its total investment banking 4.3% year over year and 2.8% sequentially to $1.64 billion in the third quarter. During the period, debt underwriting revenue increased 15.0% year over year and 39.0% sequentially to $584 million.

Morgan Stanley Chairman and CEO James Gorman said he believed the company's market share in debt capital markets was the best it has had in years.

"We made a major push with our DCM business, and I think you saw results," he said according to a transcript of an earnings call.