Investment Banking Models
Executive Summary
Key Takeaways
- ✓ An investment bank's model should separate advisory, underwriting, and trading revenue into distinct lines, each with its own driver, rather than blending them into a single fee-income figure.
- ✓ Advisory revenue is driven by completed deal volume and typical fee percentages by deal size and type, and is inherently lumpy — a small number of large transactions can dominate a given period's result.
- ✓ Underwriting revenue is driven by capital markets issuance volume and market share, and correlates closely with broader market conditions and issuer confidence, making it one of the most cyclical revenue lines in the model.
- ✓ Trading income should be modelled distinctly from fee-based revenue, reflecting market-making and proprietary or client-facilitation positions, with materially higher volatility and different risk characteristics than either advisory or underwriting fees.
- ✓ Capital markets cyclicality should be represented explicitly in the model's scenario framework, since smoothing these revenue lines into a steady average growth rate misrepresents how genuinely volatile this business is.
Objective¶
This guide covers how an investment bank's financial model should represent its distinct revenue lines, within the Banking Financial Modelling pillar, as a financial institution type whose earnings are driven by capital markets activity rather than the balance-sheet spread covered in Banking Business Model.
Three Structurally Distinct Revenue Lines¶
| Revenue Line | Driver | Volatility Profile |
|---|---|---|
| Advisory fees | Completed deal volume, fee percentage by deal size/type | Lumpy — a small number of large deals can dominate a period |
| Underwriting fees | Capital markets issuance volume, market share | Highly cyclical, correlated with market conditions and issuer confidence |
| Trading income | Market-making and proprietary/client-facilitation positions | Highest volatility, distinct risk characteristics from fee income |
A model that blends these into a single fee-income line obscures which driver actually produced any given period's revenue change, and prevents a reader from assessing how much of the result is repeatable versus opportunistic.
Modelling Advisory and Underwriting Fees¶
Advisory Revenue = Σ (Completed Deal Value × Applicable Fee Percentage, by deal size/type)
Underwriting Revenue = Σ (Issuance Volume × Market Share × Applicable Fee Percentage)
Both should be built from a pipeline or market-activity assumption rather than a smooth growth rate, since the underlying deal and issuance activity they depend on does not itself grow smoothly period over period.
Modelling Trading Income Separately¶
Trading income should be modelled as its own distinct line, reflecting the bank's market-making and position-taking activity, since it carries materially different volatility and risk characteristics than fee-based revenue. Presenting trading income within the same line as advisory or underwriting fees obscures the genuinely different risk profile driving it, and makes period-over-period revenue changes difficult to attribute to their actual source.
Representing Capital Markets Cyclicality¶
Capital markets activity is inherently cyclical, and a model should represent this explicitly through its scenario framework — building a base case alongside stronger and weaker capital markets scenarios that flex deal volume, issuance activity, and trading conditions together, consistent with the general discipline in Banking Scenario Analysis — rather than smoothing these revenue lines into a steady average growth rate that misrepresents how volatile the underlying business genuinely is.
Common Construction Pitfalls¶
- Blending advisory, underwriting, and trading revenue into a single fee-income line, obscuring which driver produced a given period's result.
- Modelling advisory or underwriting revenue as a smooth growth rate rather than from an underlying deal or issuance activity assumption.
- Failing to separate trading income's distinct volatility and risk profile from fee-based revenue.
- Smoothing capital markets cyclicality into a flat average growth assumption rather than representing it through an explicit scenario framework.
Continue Reading¶
Prerequisites¶
- Banking Financial Modelling — the parent pillar
- Banking Business Model
Related Technical Guides¶
How OXXON tests thisRun a free structural check with FMAE
Frequently Asked Questions
Why can't an investment bank's revenue be modelled as a single fee-income line?
Because advisory, underwriting, and trading revenue have fundamentally different drivers and volatility profiles — advisory is driven by completed deal volume, underwriting by capital markets issuance activity, and trading by market-making and position activity — and blending them obscures which driver is actually responsible for any change in total revenue.
What drives advisory revenue?
Completed deal volume and typical fee percentages by deal size and type, making advisory revenue inherently lumpy — a small number of large transactions can dominate a given period's total, unlike a steadily accruing revenue stream.
What drives underwriting revenue?
Capital markets issuance volume (equity and debt) and the bank's market share of that issuance activity, correlating closely with broader market conditions and issuer confidence, making it one of the most cyclical revenue lines in an investment bank's model.
Why does trading income need distinct treatment?
Because it reflects market-making and proprietary or client-facilitation positions with materially higher volatility and different risk characteristics than fee-based advisory or underwriting revenue — blending trading income into the same line as fee income would obscure the genuinely different risk profile driving it.
How should capital markets cyclicality be represented in the model?
Explicitly, through the model's scenario framework — building a base case alongside stronger and weaker capital markets scenarios that flex deal volume, issuance activity, and trading conditions together — rather than smoothing these revenue lines into a steady average growth rate that misrepresents how genuinely volatile this business actually is.
How does this guide relate to Banking Scenario Analysis?
It extends the general scenario discipline covered there with the specific capital-markets cyclicality dimension that an investment bank's revenue lines require.
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