The headwinds facing the world’s largest investment banks have taken their toll on revenues, productivity, operating margins and headcount. Joy Macknight reports.

Investment banking’s dog days are not yet over. Revenues have remained on a downward trajectory, with the first half of 2019 seeing the lowest results in more than a decade, according to the most recent Coalition IB Index. The index tracks the revenue streams of the 12 largest investment banks globally: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Société Générale and UBS.

Overall, global investment banking revenues dropped by 11% in the first half of 2019 compared with the same period in 2018. All three divisions – fixed income, currencies and commodity (FICC), equities and investment banking divisions – experienced a fall in revenue. FICC, which remains the most significant revenue generator for the big investment banks, contracted by 9%, while equities and investment banking divisions declined by 17% and 8%, respectively.

FICC saw revenue deterioration in all products in the first half of 2019. The decline was most significant in G10 rates, G10 foreign exchange and emerging markets macro, which saw drops of 17%, 8% and 11%, respectively. According to Coalition: “The decline in credit and securitisation was more subdued, as weaker results in structured credit and financing products were partiality offset by growth in flow revenues.” In commodities, oil revenues increased significantly; however, power and gas declined due to fewer large structured deals.

Equities’ underperformance, seen across all regions, was due to the normalisation of trading results in equity derivatives and margin compression in prime services and cash equities. Equity derivatives saw the biggest contraction (25%), followed by prime services (18%). Futures and options trading fared the best in equities, but still saw a slight contraction in revenue.

Investment banking divisions were affected by poor results in equity capital markets (ECM) and debt capital markets (DCM). According to Coalition, ECM revenues’ year-on-year decline of 12% was mainly due to poor performance in initial public offering issuances across all three regions. DCM revenues dropped by 9% as syndicated loans continued to underperform, while bond underwriting remained flat. Regionally, the greatest fall in DCM was in Europe, the Middle East and Africa due to “significant weakness” in loan syndication activity.

Merger and acquisition (M&A) activity saw an uptick in the first quarter of 2019; however, the second quarter proved much slower, which led to an overall 3% decline in revenues year on year.

In addition to falling revenue, the headcount – defined as revenue-generating front-office full-time equivalents – across the world’s largest investment banks continues to contract year on year, according to Coalition. Staff reduction in equities has accelerated due to business exits, as well as rationalisation drives. FICC’s shrinkage in headcount was largely attributed to commodities and G10 rates, areas in which some banks have scaled down their businesses. In investment banking divisions, there was a marginal reduction in DCM, while headcount in M&A and ECM remained constant.

Productivity has also fallen across all divisions, being driven by declines in both revenues and headcount. FICC productivity was notably the lowest since the first half of 2014. In addition, operating margins declined by 500 basis points in the first half of 2019, to the lowest level in the past four years. “The overall reduction in expenses could not offset the decline in revenues,” according to Coalition. The good news is that compensation expenses were reduced, but there were increases in technology and non-compensation expenses.

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