Prime brokerage and trading in equity derivatives are offering attractive growth opportunities to investment banks, according to Boston Consulting Group.


While the investment banking industry enjoyed record earnings in the first quarter of 2005, second quarter results were sobering, according to the new report by Boston Consulting Group.


The Boston Consulting Group (BCG) investment banking performance index, which tracks the results of leading investment banks, declined by 51 points to 87 points in the second quarter of 2005 - its steepest decline since 2001 - according to BCG's latest report.


Investment banks faced a challenging interest-rate market in the second quarter as the spread between US short-term and long-term yields further declined to merely 25 basis points. So it was no surprise that the fixed-income trading revenues of leading investment banks declined by 30 per cent from the previous quarter.


However, global equity-trading results also receded 18 per cent from the first quarter 2005, as market volatility remained low and commoditisation of cash equity trading depressed margins.


While trading results were meagre, the global advisory market picked up significantly. Both announced and executed deals increased by 13 per cent from the first quarter, as several big mergers occurred, some of them across borders. Industry experts appear confident that this trend will continue as European corporations are focusing on growth again following recent restructuring and cost cutting efforts.


Fixed-income and cash equity revenues declined overall, and banks are shifting their efforts to growth market segments. In addition to prime brokerage, which provides trade execution services to hedge funds, trading in equity derivatives offers attractive growth opportunities. The BCG report estimates that global revenues from equity derivatives will grow to USD 20 billion in 2007.


The business comprises three primary product groups - structured products, which are traded over the counter, account for half of the market, while exchange-traded derivatives and convertibles make up the remainder.


"We expect significant revenue opportunities for banks in equity derivatives," says Svilen Ivanov, leader of BCG's global investment banking practice and co-author of the report. "Product volumes, which should grow by 10 to 15 per cent annually, will be supported by lower trading costs and constant product innovation. Customer demand for leverage and capital protection will remain high."


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