COLUMN-Q3 M&A numbers don't look pretty on Astini News

So while we wait for UBS's executive board to have its fill of R&R at the Singapore Grand Prix (who knows, maybe they'll discuss the future of the investment bank in the pits and draw lots to see who gets sacrificed: if not on the altar of decorum then maybe under the wheels of the Sauber C30 Ferrari to keep it an all-Swiss affair), I did some number crunching, ahead of the Q3 reporting season. Long story short: it's not pretty out there.

JP Morgan's CEO Staley used just two slides in his presentation. As you'll recall, the headline news was that the bank's market revenues will be around 30 percent down, based on the current run-rate from the second quarter. Staley also said investment banking fees would be way down at around $1 billion.

Given that JPM had been showing most of its competitors a clean pair of heels of late, I did wonder at the time how the rest of the bulge-bracket banks, and the next rank down, were going to make out.

Given the market volatility and consequent lack of capital markets and M&A activity, it's no wonder revenues are down.

Announced M&A in the third quarter is down 30 percent from Q2 at $492 billion, according to Thomson Reuters. That's the lowest quarter for deal-making activity since Q3 2009.

And for all the talk of emerging markets pushing M&A forward, they account for just 12 percent of deal activity, down from 17 percent in the same period of 2010. That's disappointing. At the same time, while private equity-backed M&A is 21 percent up so far this year, Q3 is down 23 percent on Q2, and is minus 30 percent versus Q3 2010.

But beyond the broad expectations of lower revenues from investment banking, the extent of the quarter-on-quarter decline still shocks. If the numbers are borne out at quarter end - and a glance at the third quarter data to Sept 21 suggests the numbers will be awful - I can't imagine anything other than an aggressive response by investors.

Share prices are in disarray once again, and that comes on top of existing woes for the banks about the availability (or lack of availability) of long-term senior funding, thin liquidity, insufficient capital, waning government support and credit downgrades.

I looked at data from a representative universe of 14 global and multi-regional investment banks (JP Morgan, Bank of America Merrill Lynch , Morgan Stanley , Goldman Sachs , Credit Suisse , Deutsche Bank (DBKGn.DE), Citigroup , Barclays Capital , UBS, BNP Paribas , RBS , HSBC , Nomura , and Societe Generale ) across M&A, debt capital markets (DCM), equity capital markets (ECM) and syndicated lending. For the purposes of my evaluation, I omitted firms that generate the vast majority of their revenues from their home markets. Nothing wrong with that, but I wanted to show global industry effects. So I chose banks that earn at least 35 percent of their fees away from their domestic markets. That put the likes of Wells Fargo, Jefferies and Mizuho outside the sample, even though they have decent showings in the overall global fee rankings.

One of the key takeaways from the data resonates with something I've written about in the past: the system clearly continues to be grievously over-banked. The top 25 fee earners in global investment banking year-to-date account for a little over 60 percent of the total fee take of $61.2 billion. Bearing in mind that by the time you get to number 17, the wallet share is less than 1 percent, you get a sense of how incredibly long the tail is.

I see little evidence at this point that anyone's seriously considering exiting the business. That said, it'll take some time for the increased cost of doing business in IB to take effect, be it in higher regulatory costs, higher operational costs, higher funding costs and potentially lower returns on equity.

As for the numbers themselves, Q3-to-date fees for my sample were $6.1 billion. That's a 50 percent decline over the second quarter and, to get around issues of seasonality, it's 40 percent off off Q3 2010 too.

JP Morgan still heads the overall year-to-date fee table but the bank has some pretty negative momentum. By contrast, Merrill Lynch has motored to the front this quarter with fees of $981 million against JPM's $751 million. As for wallet share, Merrill garnered 14.23 percent in ECM, up from 6.04 percent in the second quarter and way ahead of the rest of the Street. In fact, Merrill's ECM fees of $387 million were double those of second-ranked Morgan Stanley.

There's more than a hint that JP Morgan is having an off quarter relative to the industry, just as Goldman did in Q2. In fact, if JPM's wallet share fell marginally in DCM (down 12 basis points) it cratered in ECM (down 234bp), as well as syndicated lending (down 172bp) and M&A (down 161bp).

In fact, JPM is easily the worst quarter on quarter performer of the sample, with an aggregate market share decline of 160bp. So the overall industry effect won't exactly reflect Staley's comments, but it's nevertheless going to be a case of seeing who produces the least bad numbers as opposed to the best. Hardly a convincing investment proposition.

For fee and wallet share tables, please go to here and follow the free-to-view links from my commentary page. (Created by John Manley)