IFR Review of the Year 2003
What a difference a year makes. If scandals, serial investigations and large-scale job losses made 2002 one of the worst in living memory for the investment banking industry, 2003 was a year of enormous opportunity.
Conditions were favourable for much of the year, certainly for financing but more particularly for trading. A stabilising macroeconomic picture, rising stock markets, better corporate profitability, historically low interest rates, an abundance of buyside liquidity and a fair amount of volatility, all enabled investment banks to supercharge their earnings via the trading desk.
The year did have its bouts of excess volatility. Late July saw the sharpest spike in dollar swap spreads since the LTCM crash of 1998, and dealing desks, particularly at the big proprietary shops, did experience some fall-out. But most were able to shrug off the effects without long-lasting damage.
With so much emphasis on trading, 2003 was not a standout year in terms of corporate business. There was a smattering of financing triumphs – the year will be remembered for innovative cross-product recapitalisations – but it was another poor year generally for corporate event activity, as M&A volumes showed no sign of appreciably picking up.
For much of the year, product originators encouraged, and were successful in persuading clients to be opportunistic about financing, and to front load requirements ahead of potentially higher rates and wider spreads in 2004. Corporate treasurers rarely need to be asked if they want access to cheap financing, and the result was a financing binge in the bond market.
One notable feature of the debt capital markets was that euro issuance raised close to €1trn, a third more than the international dollar market. Even with the domestic dollar market added in, dollar funding was still only on a par with euros. This was the year the euro market finally grew up.
Debate continued to rage about which organisational and business model worked best – DCM plus ECM, integrated debt platforms, stand-alone specialist teams, or some other combination. By the end of the year, we were no nearer having an answer, and the reality is that different firms are finding their own solutions.
Pulling it all together, selected banks and broker dealers reported record quarterly earnings during 2003. There was a renewed vigour not just in generating increased revenues, but also in business focus, capital efficiency and other performance metrics designed to create shareholder value. This trend bodes well for bank shareholders.
As in previous years, this 2003 Review of the Year accompanies the final issue of the year. IFR congratulates all market participants for their achievements, and offers its readers very best wishes for the holiday season and for a prosperous 2004.