I-banking Off To Strong Start In 2014 As Morgan Stanley Leads

I-banking Off To Strong Start In 2014 As Morgan Stanley Leads

I-banking looks upbeat with announced deal volumes in 2Q are up nicely Q-Q, aided by strong IPO volumes, according to a recent report from research firm Jefferies.

Ken Usdin and team at Jefferies in their May 12th report, analyzed 1Q i-banking and trading results of large nine i-banks.

I-banking: Strong advisory volumes anticipated

The Jefferies analysts point out that i-banking fees were strongest for Morgan Stanley (NYSE:MS), Credit Suisse Group AG (ADR) (NYSE:CS) and Goldman Sachs Group Inc (NYSE:GS) in 1Q 14. This can be seen from the following graph:

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Interestingly, advisory fees were up 31% year over year, as all banks witnessed Y-Y growth ex-Citi. The following graph highlights the strong performance in advisory fees posted by Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB), JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS) in the 1Q14.

Strong advisory revenue growth I-banking

The Jefferies analysts anticipate that advisory volumes will continue to grow at a healthy clip, as potential buyers are flush with cash and have limited opportunities for self-improvement going forward given operating margins are already quite high.

Positive management commentary

The Jefferies analysts point out that management commentary on banking pipelines was generally positive. The following table captures the overall positive note struck by management on their i-banking pipeline and backlog:

Positive comments on i-banks pipeline

The analysts note so far in 2Q, announced deal volumes are up nicely Q-Q while IPO volumes remain strong and DCM volumes are tracking lower. The following table captures the sluggish performance in DCM:

Sluggish DCM I-banking

The following table highlights the investment banking activity of US and European banks:

US and Europe I-banking summary

FICC faces tough first quarter

The Jefferies analysts note consistent with seasonal trends, 1Q FICC trading revenues (ex. CVA/DVA/FVA gains and losses) were up 57% Q-Q on average. However, FICC revenues decreased 16% Y-Y. As set forth in the following graph, Morgan Stanley (NYSE:MS) was the only bank to witness Y-Y growth, thanks to better results from mortgage, credit and commodities:

Fixed income trading revenues

Though there were concerns that new Swap Execution Facilities could have negative impact on 1Q activity, bank management generally acknowledged that the impact from SEFs was not significant in the first quarter.

The following table illustrates the trading summary for US and European banks for the quarters begging 1Q13:

Trading summary for US and European Banks

The Jefferies analysts prefer Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) over Citigroup Inc. (NYSE:C), after the pullback has drawn valuations closer. However, the analysts note each still faces burdens related to EPS, capital return and litigation.

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