IF THE FIRST quarter of the year was a bust, traditionally the most active quarter for deal-making, does it follow that the entire year will be a write-off for investment banking revenues?
Will accommodative windows present themselves in markets and will rising confidence levels emerge to alter the seasonality or cyclicality of markets we’ve gotten used to as banks ram outstanding supply through whatever channels are open to take up some of the slack?
There’s not a lot of hard evidence to support that thesis although I’m willing to buy it in principle. That said, even Goldman Sachs noted in its earnings statement that while its IB transaction backlog was higher than it was at the end of the first quarter of 2015, it had decreased compared with the end of last year.
Let’s be clear: the first quarter was dreadful. The Q1 net revenues of the Big Five US investment banks (BofA Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley) from advisory, underwriting and trading fell by over 23% year-on-year to below US$21.5bn.
First-quarter FICC net revenues of those banks fell by around a billion dollars a year between 2012 and 2014 – from US$17.75bn to US$16.3bn to US$15.4bn, pausing only briefly from 2014 to 2015 as the Swiss National Bank provided that lifeline by removing the Swiss franc peg and fuelling huge, and welcome, FX volatility. This year’s headwinds, in contrast, have spawned nothing but bad volatility.
The latest quarter saw FICC net revenues slump almost 29% year-on-year to below US$11.5bn. Each of the banks gave variations on a theme to account for their poor performance but whichever way you slice it, Morgan Stanley and Goldman Sachs had dreadful quarters, down 54% and 47%, respectively. I suspect Goldman’s poor performance will have Jim Esposito, recently appointed as head strategy for the securities division, scratching his head.
JP Morgan continues to drive up its share of the Big Five, increasing its FICC take by six percentage points over two years to almost a third (31.33%) of the aggregate number. It’s taken that from Goldman Sachs and Morgan Stanley, whose combined Big Five FICC market share losses over the same period, down 7.61%, broadly mirrors JPM’s gains.
THE PROBLEM THE banks have is that the headwinds encountered by the markets have, since the start of the year, lain waste to everything before them. M&A, the ultimate barometer of confidence, is down 27.5% year-to-date, albeit following a record year. DCM is off 19%. Goldman was the clear upside outlier here, with a 24% uptick in Q1 revenues that it put down to an increase in investment-grade activity. The others all posted declines: JPM’s DCM number was down 35% and Morgan Stanley’s fell by almost 40%.
At the same time, ECM has fallen off a cliff. Equity underwriting revenues of the Big Five fell 53% in Q1 to just US$732m. Goldman fared worst here, reporting a 66% reduction in net revenues. Given the volatility we saw in January and February, it’s no surprise that the IPO market almost ground to a complete halt in the US; just six transactions worth US$407m in Q1, down 91.5% from an already poor Q1 2015. EMEA IPO volumes fell 82% to US$3.68bn. Asia-Pacific IPOs outperformed, falling by ‘just’ 36% to US$8.2bn although in the process the region doubled its global market share from one-third to two-thirds.
Aggregate equity trading revenues fell more than 13% to US$7.15bn. Goldman again took up the rear-guard with a 23.5% decline while Morgan Stanley maintained its prime position (although revenues still fell 10%) with revenue of US$2.06bn.
THE GOOD NEWS, if you can glean anything positive from the above, is that the numbers weren’t as bad as many were expecting so the shock factor was muted. Also, March was distinctly better than the previous couple of months and the indications are that April is a lot more like March.
It only takes one positive factor to drive the kind of volatility that encourages buyside clients to trade. The UK vote on EU membership is something of a wild card in terms of how it influences market behaviour so the two things I am confident enough to forecast are that it has been acting as an activity blocker and its impact is likely to be binary – although I’m not entirely sure which outcome will spawn what reaction.
Could the simple fact that the referendum has happened drive a relief rally, I wonder?
Markets do have a tendency to overplay negatives, only for downsides to be reversed and access windows open up relatively quickly. Think about the number of people writing off bank capital instruments following that flurry of panic in February only for the market to splutter into action in the following weeks. Euro FIG supply this week captured solid demand in the best week of the year so far.
In similar vein, people are starting to talk up the European high-yield market as despair around LBOs lightens and refinancing comes into visible supply. Could the heavily negative dollar/yen basis propel more Japanese issuers into the dollar market? And now that Mario Draghi has given us more details of his corporate sector purchase programme, could the dynamic of the euro corporate sector change and drive opportunistic bond supply?
On that basis alone, I say it’s too early to write the year off. There’s still everything to play for.
