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INVESTMENTBANKINGANDCAPITALMARKETSMarketReport–SecondQuarter2004EditionNewYork,FrankfurtSeptember1,2004THEBOSTONCONSULTINGGROUP-1-Q22004MarketReport-BR-TM-NYC-1Sep04.pptTABLEOFCONTENTSChapterPage2917242935OverviewofSecondQuarter2004RevenueOpportunitiesfromHedgeFundsMarketReview•CorporateFinanceandAdvisory•Fixed-IncomeTrading•EquityTradingDataDefinitionsandAbbreviations-2-Q22004MarketReport-BR-TM-NYC-1Sep04.pptOverviewofSecondQuarter2004-3-Q22004MarketReport-BR-TM-NYC-1Sep04.pptINVESTMENTBANKINGPROFITSDECLINEDSHARPLYTheIndustryFacesaToughSecondHalfUnlessEquityTradingBouncesBackBCGinvestmentbankingperformanceindexdeclinedby29pointsto99inthesecondquarter2004•However,secondquarterresultswerestillbetterthanthoseofoneyearago•Inaddition,resultsfromthefirsthalfof2004werestrongWhilerevenuesfromfixedincomedecreasedsignificantly,mostofthedeclinewasseasonal•Revenuesfromfixed-incometradingdeclinedby13.9%frompreviousquarterLowmarketvolatilityhitearningsfromequitytradinghard•Equitytradingrevenueswere19.7%lowerthanlevelsthreemonthsagoCorporatefinanceandadvisory(CF&A)revenuesimprovedacrossbusinesses,buttheincreasewasnotstrongenoughtocompensateforlowertradingrevenues,whichdeclinedby16.1%fromthefirstquarter•CF&Arevenuesimprovedby12.3%onaverageSource:Companyreports,BCGanalysis-4-Q22004MarketReport-BR-TM-NYC-1Sep04.pptBCGPERFORMANCEINDEXDECLINEDSHARPLYINSECONDQUARTER2004,BUTWASSTILLHIGHERTHANLASTYEAR’SLEVELS98.9127.687.491.096.290.548.244.771.251.860.280.1100.076.70204060801001201401Q/012Q/013Q/014Q/011Q/022Q/023Q/024Q/021Q/032Q/033Q/034Q/031Q/042Q/04BCGInvestmentBankingPerformanceIndex200120022003IndexNote:TheBCGIBperformanceindexiscalculatedbasedonaggregateprofitsof10leadingbanksSource:Companyreports,BCGanalysis-5-Q22004MarketReport-BR-TM-NYC-1Sep04.pptBONDTRADINGREMAINEDSTRONGWHILEEQUITIESBUSINESSESSLOWEDINSECONDQUARTER20040501001501Q/013Q/011Q/023Q/021Q/033Q/031Q/04$BCorporateBondOrigination02004006001Q/013Q/011Q/023Q/021Q/033Q/031Q/04M&AAdvisory(1)$B0200400600800100012001Q/013Q/011Q/023Q/021Q/033Q/031Q/04$BU.S.BondTrading(2)02468101Q/013Q/011Q/023Q/021Q/033Q/031Q/04$TrEquityTradingU.S.AsiaEurope(1)Basedoneffectivetransactions(2)Dailyaveragetradingvolumesfortreasuries,agencies,asset-/mortgage-backedsecurities(ABS/MBS),andcorporatebondsSources:Dealogic;SDC;FIBV;FederalReserveBankofNewYork;BCGanalysis-6-Q22004MarketReport-BR-TM-NYC-1Sep04.pptINVESTMENTBANKINGREVENUESANDPROFITSDECLINEDQ2/04vs.Q1/040%10%20%30%40%50%0.51.01.52.02.53.03.54.04.55.0Revenues($B)Ø–9.6%Ø–4.5%LBMLGSMSJPMCCitiBSDBCSFBUBSPre-taxprofitmargin(%)Q1/04Ø:35.0%Q2/04Ø:30.5%Q1/04Q2/04Note:Øcalculatedonarevenue-weightedbasis;operatingrevenueforinvestmentbankingandinstitutionalsalesandtradingSources:Companyreports,BCGanalysis-7-Q22004MarketReport-BR-TM-NYC-1Sep04.pptHOWEVER,RESULTSINMOSTCASESBETTERTHANLASTYEARQ2/04vs.Q2/03Ø+1.0%0%10%20%30%40%50%0.51.01.52.02.53.03.54.04.55.0LBMLGSMSCitiBSDBCSFBUBSJPMCPre-taxprofitmargin(%)Q2/04Ø:30.5%Q2/03Ø:29.6%Q2/03Q2/04Revenues($B)Ø+4.4%Note:Øcalculatedonarevenue-weightedbasis;operatingrevenueforinvestmentbankingandinstitutionalsalesandtradingSource:Companyreports;BCGanalysis-8-Q22004MarketReport-BR-TM-NYC-1Sep04.pptTRADINGREVENUESDECLINEDWHILECORPORATEFINANCEANDADVISORYIMPROVED55%60%65%70%75%80%85%90%0.51.01.52.02.53.03.54.01Q/042Q/0410%15%20%25%30%35%0.20.40.60.81.01.2CorporateFinance/AdvisoryRevenues2Q/04vs.1Q/04MSLBCitiGSGSLBCitiMSMLJPMCRevenues($B)Revenues($B)Ø–16.1%Ø+12.3%MLBSBSØ:75.2%Ø:24.0%JPMCCSFBDBUBSDBUBSCSFBTradingRevenues2Q/04vs.1Q/04Tradingrevenueaspercentageoftotalrevenues2Q/04CF&Arevenueaspercentageoftotalrevenues2Q/04Note:Tradingandcorporatefinancerevenuesdon‘ttotal100%becauseof“other”revenueSources:Companyreports;BCGanalysis-9-Q22004MarketReport-BR-TM-NYC-1Sep04.pptRevenueOpportunitiesfromHedgeFunds-10-Q22004MarketReport-BR-TM-NYC-1Sep04.pptINVESTMENTBANKSNEEDTORETHINKTHEIRCUSTOMERSERVICEANDCOVERAGEMODELSFORHEDGEFUNDSHedgefundsareoneofthemostattractivecustomergroupsforinvestmentbanks•Hedgefundsaregrowingfast:Industryisexpectedtocontinuetogrowby16%annuallythrough2005•Relativelystablefeelevelsinthehedgefundindustryprovidehigh-marginbusinessopportunitiesforinvestmentbanksHedgefundindustrygeneratesrevenueopportunitiesalongthevaluechain•Weestimatethatmanufacturing,packaginganddistributionproduced$45billioninrevenueand$15-20billioninprofitlastyear•Whileservicinghedgefundsacrossassetclassescreatedrevenueopportunitiesof$14billionandprofitof$5-6billionServicingthehedgefundcommunitycreateschallengesforinvestmentbanks•Investmentbankshistoricallyhaveoperatedandorganizedaroundproductsilos,whilemanyhedgefundsrequireanintegratedproductandserviceofferingacrossassetclassesInvestmentbanksmustrethinktheircustomerserviceandcoveragemodels.Inparticular,theyshould•Buildcross-functionalandcross-productsalesforces•Unbundletheirserviceofferings,e.g.,providedirectmarketaccesswithlowexecutionsupportwhileprovidingtradingalgorithmsandfirst-callresearchsupport-11-Q22004MarketReport-BR-TM-NYC-1Sep04.pptWORLDWIDEHEDGEFUNDASSETSEXPECTEDTOGROWT