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ANALYSIS OF BUSINESS STRUCTURES OF INVESTMENT BANKS IN MATURE INTERNATIONAL MARKETS

General Analysis of Business Structures of Investment Banks in the United States

Investment banks in the United States are mainly engaged in the brokerage business, investment banking business, proprietary business, and asset management business. The brokerage business reaps commission income from transactions of shares, commodities, futures, or over-the-counter (OTC) instruments. The investment banking business includes two business lines: (1) securities issuance, and (2) underwriting and counseling, which consists of underwriting of bonds, shares and share-related securities, and counseling services in relation to M&A and equity incentives. The proprietary business includes market maker transactions and investments. The asset management business includes investment account management and investment portfolio counseling for individual investors or institutional clients.

From the perspective of business revenues in this industry, the total revenue of the U.S. securities industry in 2003, for example, was USD 144.5 billion. Of that amount, 25.6 billion (17.5 percent) came from commission fees, 15.1 billion (10.3 percent) came from securities underwriting, 2.1 billion (1.4 percent) came from securities investment, 23.1 billion (15.8 percent) came from market maker transactions, 4.8 billion (3.3 percent) came from interest incomes in credit transactions, 11.8 billion (8 percent) came from asset management, 6.1 billion (4.1 percent) came from mutual fund sales, and 47.9 billion (32.8 percent) came from other securities related incomes (see Figure 8.3).

Revenues of Various Business Lines of the U.S. Securities Industry in 2003 Source: Bloomberg.

FIGURE 8.3 Revenues of Various Business Lines of the U.S. Securities Industry in 2003 Source: Bloomberg.

Trend of Percentages of Commission and Asset Management Revenues in the Total in the U.S. Securities Industry (1980-2003)

FIGURE 8.4 Trend of Percentages of Commission and Asset Management Revenues in the Total in the U.S. Securities Industry (1980-2003)

Source: Bloomberg.

Of the commission revenue, 14.4 billion (56 percent) came from commissions for transactions of shares at stock exchanges. The remaining 44 percent came from commissions for OTC transactions of securities, futures, and other items (see Figure 8.4). Of the underwriting revenue, 24.5 percent came from stock underwriting income. Of the market maker transaction revenue, 75.8 percent came from bond transactions (see Figure 8.5).

In terms of the development trends of the various business lines, the proportion of commissions decreased from 35 percent in 1980 to 14 percent in 2003. The proportion of asset management income rose from 1 percent in 1980 to 8 percent in 2003. The proportions of underwriting

Trend of Percentages of Underwriting and Market Maker Revenues in Total in the U.S. Securities Industry (1980-2003)

FIGURE 8.5 Trend of Percentages of Underwriting and Market Maker Revenues in Total in the U.S. Securities Industry (1980-2003)

Source: Bloomberg.

and market maker incomes were relatively stable, showing insignificant signs of change.

The next section will examine the case studies of four representative American investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers. Dissecting the business structures of investment banks in the United States will help shed some light on the path for future development of Chinese securities companies.

 
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