Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Let’s Look Under the Banks’ Hood (Declining revenues may take care of that nasty compensation issue) | April 1, 2009


A quick look at the first quarter ’09 Underwriting revenue statistics released today by DealLogic suggests that Underwriting may not be such a big source of increased profitability for banks. While total proceeds raised increased 27% from $1.344 billion to $1.707 billion, industry wide fee income was down 11.9%. The results were far worse for a number of the former industry leaders whose liquidity and stability are in question.The differences are, in part, explained by the fact that there was less activity in the higher margin areas of equity and less than investment grade debt issuance. More interesting is a look at the underwriting revenues of individual banks. Only Deutsche Bank and Royal Bank of Scotland posted increases in underwriting revenue. Names like Citi, Goldman and BofA did not fair well at all. If Citi and BofA are going to have up first quarters, it won’t be from underwriting. Citi’s first quarter revenues were down 31.3% and B of A’s declined a whopping 56%. The mighty Goldman Sachs fell from third to tenth on the League Table and saw its underwriting revenues fall 45%, which was worse in total dollars and percentage terms than even Citi’s results.

The changes probably reflect a few things. First, the more stable banks, like JP Morgan and Deutsche, are likely to be the leaders going forward. While Citi and BofA were still marginally ahead of Deutsche, their precipitous declines point to an issuer abandoment trend that may not be quickly restored. Were it not for a few old relationships, which probably meant joint books on the right and conferred less real revenue than DealLogic thinks, they would likely be behind Deutsche. Second, were it not for major refinancing by investment grade names, who were taking advantage of market windows and proactively moving to protect their balance sheets, revenues would have been much worse for everyone. These event phenomenons, if true, may not be indicitive of great ongoing revenue streams. Third, Goldman’s fall off reveals just how dependent they really were on equity and less than investment grade issuance. In the last few years they evolved into a higher risk shop dependent on proprietary trading and investments together with higher margin and risk underwriting.

Perhaps the Obama administration need not worry about legislating bank compensation. Decining Underwriting and other bank revenues may do the job for them!!

Bank Underwriting Revenues First Quarter 2009 v 2008 may be found below:

http://online.wsj.com/mdc/public/page/2_3106-FeesStocksBonds-Q12009.html

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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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