Analysis of the Investment Banking Industry: Lazard - Citigroup

Seminar Paper, 2010

11 Pages, Grade: 1,33




Investment Banks

Detailed analysis Lazard vs. Citi



Investment Banks

The financial crisis of 2007-2008 was a crucial stage in Investment Banking industry. It accelerated the need of greater focus on core business and solidified the need of greater transparency in banking. We believe this would increase the importance of independent investment houses. We have identified six trends that will influence Investment Banking Industry in the future.

- Regulations and greater transparency are here to stay.

Since the financial crisis, the role of Investment Banks has come under intense scrutiny. Excessive use of bank’s capital on risky business along with frugal compensation packages has brought social outrage on the activities of the Investment Banks. Backed by strong public mandate, we expect governments and central bank authorities around the world to follow the United States and Europe in enforcing strict controls over Investment Banking activities through tighter policies on capital and risk management. Also there will be increased focus on standardization of instruments and on regulating OTC instruments on exchanges. Dodd-Frank in United States and Basel III are some of the prime examples of regulations post financial crisis. (Refer to Table 2 for Regulations Impact)

- Decline in Revenues from M&A and other sources. The

continued scrutiny on the activities of Investment Banks along with an uncertain macroeconomic environment will reduce mergers and acquisitions activity (M&A) thereby negatively affecting the fees of the industry. Specifically, following factors have contributed significantly to the decline of corporate confidence and thereby M&A volumes:

- Economic slowdown in United States and Europe - key regions for M&A revenues.
- Implementation of austerity measures in Europe.
- Currency wars between emerging markets and developed countries.

Chart1: Decline in IB Revenues (Source: Thomson Reuters)

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Chart 2: Proprietary Trading as % of Group Revenues (Source Economist)

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New regulations restricting risky activities (such as Volcker Rule in the US) and tightening capital and liquidity requirements (Basel III provisions), will increase the demand for simple and standardized products (hence lower revenues) instead of complex products. At the same time, securitization will become less attractive. Proprietary trading - “cash cow” to certain banks before the crisis, is one such area where regulations will reduce activity of the Investment Banks and potentially hurt their revenues. (Refer to Chart 2 for Impacts on Major Banks)

- Globalization is the new normal. As implied from the

Chart 3 below, emerging markets, led by BRIC countries, are driving up the global M&A scenario. M&A involving companies located in the emerging markets totaled USD 345.5 billion during first half of 2010, an 84.4% increase over the first half of 2009i. Issuers from the emerging markets have raised USD 92 billion this year, accounting for 62% of IPO volume this year. China’s Agricultural Bank (USD 22.1 billion) and Brazil’s Petrobras (USD 66.8 billion) were the biggest initial public and follow on offerings respectively for 2010.

Chart 3: Global Investment Fees by Region. Growth in Asia Pacific, Japan and Americas in contrast to decline in Europe (Source: Thomson Reuters)

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Backed by strong economic growth in their home markets, cash rich companies from emerging economies will continue to expand globally, especially in the areas of Financials, Energy, Telecommunications and Natural Resources. In the first nine months of 2010, Energy and Power accounted for 20.5% of announced M&A with Financials and Materials sector contributing 15.5% and 12.8%iii, respectively. Together with rise in public offerings by state owned enterprises in China and Brazil, there will be opportunities for Investment Banks, especially the ones with global advisory and capital markets capabilities.

- Emergence of Mid Market (less than USD 500 million)

Activity in M&A. The financial crisis has provided a spurt in mid market activity especially in M&A - a section generally ignored by bulge Investment Banks. M&A deals valued up to USD 500 million totaled USD 311.7 billion in the first half of 2010 - a 42.3% increase over the first half of 2009iv. Buoyed by lower valuations post the financial crisis and globalization, mid level companies are bargain hunting, thereby offering an increased opportunity to Investment Banks to tap for capital raising and advisory business.

- Distressed Debt Advisory and Bankruptcy Restructuring

is in demand. An increasing number of defaults and tighter access to credit have raised the demand for bankruptcy restructuring and distressed debt advisory among corporates. The first half of 2010 saw USD 125 billion in distressed debt and bankruptcy restructuring activityv. Lynondell Basell Industries’ USD 24 billion restructuring was the largest debt restructuring in the year.

- Human Capital and Innovation will be key. Banks will need to continue to invest in people and innovation to differentiate themselves from one another. Despite the already competitive landscape of Investment Banking industry, the emergence of new mid-level and independent players would increase pressure on existing players. Therefore, retention and adding staff in key business segments would be crucial for the Industry growth.

Based on the current and future trends, we believe Goldman Sachs, Morgan Stanley and JP Morgan will dominate the global Investment Banking scenario based on their traditional strength in advisory and capital markets. European banks - UBS and Credit Suisse will continue to be strong players in the Industry because of their expertise in capital markets and wealth management. With the implementation of Basel III, we believe European banks such as Deutsche Bank and Barclays Capital will need to raise a significant amount of capital to meet the tier 1 requirements, thereby affecting their prospects in near term. In contrast, American and Swiss banks are better capitalized with higher Tier 1 ratios. In the boutique segment, we believe Rothschild and Lazard will continue to dominate the segment which is characterized by a large number of small players.

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Table 1: Key Trends and their Impact

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Table 2: Regulations and Impact. (Source JP Morgan Research Report on Investment Bank and Forecast for 2011)


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Analysis of the Investment Banking Industry: Lazard - Citigroup
IE Business School, Madrid
Introduction to Capital Markets
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analysis, investment, banking, industry, lazard, citigroup
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Anonymous, 2010, Analysis of the Investment Banking Industry: Lazard - Citigroup, Munich, GRIN Verlag,


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