The last six months of 2018 were not kind to investment banking revenues, according to the Index report from analyst Coalition. The report tracks the revenue streams of the 12 largest investment banks globally: Bank of America-Merrill Lynch, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Société Générale and UBS. The picture is not particularly rosy.
In absolute terms, investment banking revenues have decreased by about 8% over the past five years, from $164.6bn in 2014 to $151.4bn in 2018. Last year’s figure was broadly the same as 2017’s, but this was mainly thanks to a very strong first half for mergers and acquisition (M&A) advisory and equity capital markets (ECM). Volatility spiked later in the year, battering revenues across the board, with debt capital markets (DCM) hit particularly hard by widening credit spreads and an issuance drought in December. It was the worst second half since 2011.
Within the investment banking division, revenues from ECM transactions recovered from a big dip in 2016. This market is particularly sensitive to volatility. The drop in activity in 2016 coincided with geopolitical issues, such as the Brexit vote, the election of Donald Trump and turmoil in the Chinese stock market. As talk of tariffs in the US-China trade war became tougher in the second half of 2018 and the UK's scheduled departure from the EU edged closer, investors became increasingly nervous. Volatility is likely to persist for a while given that growth figures out of Europe and China disappointed and the market anticipates a corresponding slowdown in the US economy towards the end of 2019.
But there are bright spots. The credit market recovered at tremendous speed in January 2019, restoring confidence on the DCM desks. Good performance in loan syndication, especially in Asia and the US, offset some of the losses.
M&A has also been somewhat immune to negative sentiment, with revenues increasing nearly 25% over the past five years. Growth in mega-mergers and a strong performance in the Europe, Middle East and Africa region stand out. As uncertainty about economic conditions takes hold, companies will be more motivated than ever to position themselves for choppier waters, often through acquisitions or corporate divestitures. Private equity funds have more money than ever at their disposal. After several years of selling assets, the tide is turning towards more acquisitive sponsors, looking for new opportunities.
