The largest investment banks are increasingly directing their attention to Europe, the Middle East, and Africa (EMEA) to capture more of Europe's growing cross-border M&A business and origination activity, says a new report by The Boston Consulting Group (BCG).



Investment banking markets in the EMEA region have grown in importance and now represent 36 percent of the industry's global revenues. Some investment banks predict that in the next three to five years, up to 75 percent of revenue growth will come from outside the United States. As a result, several have transferred some decision-making authority and organizational emphasis away from their home operations toward Europe.

The shift is one of several trends transforming the global investment- banking landscape, according to BCG's latest quarterly Investment Banking and Capital Markets report. Other trends include the growing influence of financial sponsor and hedge fund clients, the increasing importance of risk management in proprietary trading, and the continued need for product innovation and technology investment to drive profit growth.

"Increasingly, the largest investment banks are moving from a product to a customer focus," said Svilen Ivanov, leader of BCG's investment-banking practice and coauthor of the report. "To meet the cross-functional needs of alternative-investment clients, they are mobilizing capabilities across their organizations or within specific divisions around core clients and developing innovative client-coverage models."

Building on the industry's record performance in 2006, the outlook for 2007 remains positive, with global revenues predicted to grow 10 to 15 percent, to around $335 billion. Pretax profits are expected to rise 9 to 15 percent. Among the industry's main sources of revenue, equity trading is forecast to post the strongest growth -- about 20 percent -- in 2007.

The report's in-depth analysis of fourth-quarter and annual performance shows that investment banks finished 2006 on a strong note. Profit margins at ten leading banks (Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, and UBS) increased by an average of 6.5 percentage points in the fourth quarter, while revenues increased 18.7 percent over the previous quarter.

Fixed income and equity trading did not experience the typical seasonal drop-off in the fourth quarter due to robust derivatives and commodities activity. Trading revenues for the leading banks increased 13 percent in the fourth quarter and were 45 percent higher than the same period a year earlier, on average. Gains in advisory work were also strong, as the value of M&A deals surged 34 percent over the previous quarter.

For the industry as a whole, investment banks posted record revenues and profits for the year on the back of strong corporate profitability, deep pools of global liquidity, strong equity markets, low inflation, and tightening credit spreads. Total annual revenues jumped 33 percent to $289 billion, while profits soared 38 percent to $90 billion.

Both trading and advisory work helped fuel the stellar performance. Fixed- income revenues grew 29 percent in 2006, as favorable market conditions drove higher trading activity. Revenues from equities trading surged 42 percent, due in part to sustained growth in equity derivatives. At the same time, corporate finance and advisory revenues remained strong, growing 30 percent for the year.