The Revival of Investment Banks

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Includes: BAC, BCS, BMO, BNPQY, C, CS, DB, GS, HSBC, JPM, LAZ, LUK, MS, NMR, RBS, RY, TD, UBS, WFC
by: Efsinvestment

The investment banks that barely survived the financial crises are back on their feet. According to a recent Bloomberg report, the total fees charged by the industry increased by 6% to $49.1 billion. JPMorgan Chase (NYSE:JPM) ranks at the top, followed by Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS). JPMorgan was also the most profitable company in stock equities and bond underwriting. Goldman Sachs took the top spot in advisory fees (fees from mergers and acquisitions advice).

Stock Equities

2010 was the year of government backed deals. Last year, governments around the world sold out their stakes in banks, automakers and other companies through investment banks. General Motors (NYSE:GM), who received a whopping Treasury bailout, sold $18.1 billion of common shares. U.S. Treasury’s disposal of remaining Citigroup (NYSE:C) shares was another large deal worth $10.5 billion.

China was a solid player in this equity issuance. Agricultural Bank of China's $22.1 billion IPO was China's largest first-time share sale. The IPO of American International Group's (NYSE:AIG) Asian unit, AIA Group, was the second largest IPO.

2010 also witnessed the world's largest share sale ever. Petroleo Brasileiro SA (NYSE:PBR) raised $70 billion from the Brazilian government and equity investors. There were other large IPOs from emerging markets: the $3.5 billion IPO of Coal India and the $4.7 billion IPO of Petronas Chemicals Group were the largest in the histories of India and Malaysia.

Mergers & Acquisitions

In the mergers and acquisition business, total fees increased by 23% to $17.9 billion. Exxon's (NYSE:XOM) acquisition of XTO Energy Inc. was the largest in world history. Exxon paid $41 billion in stock swaps to XTO's shareholders. Caterpillar (NYSE:CAT) agreed to take Bucyrus International (NASDAQ:BUCY) for $92 per share, offering $7.6 billion in cash. ITT (NYSE:ITT) and Sara Lee (SLE) decided to concentrate on their core businesses: ITT plans to split the defense and aerospace operations into stand-alone companies in order to unlock the value of the company. Sara Lee already sold its air care business to Procter & Gamble (NYSE:PG) and personal care business to Unilever Plc (NYSE:UN).

Bond Underwriting

Fees in the bond underwriting business fell to $14.9 billion from $15.5 billion in 2009. Thanks to low interest rates, banks in 2010 recorded the biggest two-year bond sale. Corporate bond sales' volume was $2.8 trillion. Kraft Food's (KFT) $9.5 billion corporate bond issuance was the largest corporate bond deal, followed by Berkshire Hathaway's (BRK.A, BRK.B) $6 billion bond issue. Novartis AG's (NYSE:NVS) $5 billion corporate bond sale was another significant deal.

The List

Rank

Company

Fees (in Billion)

1

JPMorgan Chase (JPM) – USA

$4.14

2

Morgan Stanley (MS) – USA

$3.67

3

Goldman Sachs (GS) – USA

$3.60

4

Bank of America (NYSE:BAC) – USA

$2.91

5

Deutsche Bank (NYSE:DB) - Germany

$2.69

6

UBS (NYSE:UBS) – Switzerland

$2.62

7

Credit Suisse (NYSE:CS) – Switzerland

$2.56

8

Barclays Capital (NYSE:BCS) – UK

$2.25

9

Citigroup (C) – USA

$2.22

10

Nomura Holdings (NYSE:NMR) – Japan

$1.57

11

RBC Capital (NYSE:RY) – Canada

$1.03

12

HSBC Holdings (HBC) – UK

$0.95

13

BNP Paribas (OTCQX:BNPQY) – France

$0.74

14

TD Securities (NYSE:TD) – Canada

$0.68

15

Royal Bank of Scotland (NYSE:RBS) – UK

$0.67

16

Wells Fargo (NYSE:WFC) – USA

$0.62

17

Lazard (NYSE:LAZ) – Bermuda

$0.61

18

Rothschild - UK

$0.58

19

Jefferies (JEF) - USA

$0.50

20

BMO Capital (NYSE:BMO) – Canada

$0.44

Click to enlarge

The list shows us the strong position of Western companies: while emerging markets experienced the strongest recovery in 2010, American and European based investment banks still dominate the finance industry.

While the recovery of investment banks is already factored in the stock prices, there is still potential for growth. The low forward P/E ratios indicate high earnings growth expectations. The forward P/E ratio of Credit Suisse is lowest [7.09], followed by Bank of America [7.86], and Barclays [8.30]. JP Morgan [8.32], Goldman Sachs [8.46], UBS [8.71], Morgan Stanley [8.78] and Wells Fargo [9.03] have forward P/E ratios lower than the historical norm of 10.

For value based investors, some of the investment banks above offer a good margin of safety. Currently, six companies in the top 20 list trade below their book value. The Royal Bank of Scotland has the lowest P/B ratio of 0.61. Bank of America [0.64], Barclays [0.73], Deutsche Bank [0.71], Morgan Stanley [0.76], Citigroup [0.83], and Nomura [0.86] trade below their book value.

The average consensus 5 year EPS growth estimate of US based investment banks is 10%. Goldman Sachs has the highest consensus EPS growth estimate of 12%, followed by Goldman Sachs [11%], Wells Fargo [9.3%], Bank of America [9%], and Citigroup [3%]. Wells Fargo is Warren Buffett’s second largest holding after Coca-Cola (NYSE:KO). The investment guru holds 342 million Wells Fargo shares worth $10.62 billion.

Citibank and JP Morgan are among hedge funds’ favorite holdings. David Tepper, whose hedge fund returned a stunning 132.72% in 2009 and 22.5% in 2010, made a fortune by investing in financial companies. His long-term holdings include $566.5 million of Wells Fargo and $334 million of Bank of America stocks. Recently, he increased his Citigroup shares by 129% to $556 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.