Independent investment banks are optimistic that 2019 will be a great year despite a rough start.
Advisory revenue across five independent banks including PJT Partners, Moelis and Greenhill fell 19% in the first quarter. In contrast, the five largest US banks saw advisory revenue rise 18% in the quarter as they pulled back market share from smaller rivals that had been confident they would continue to take share from bulge and bracket banks.
All the independent banks felt the impact of a sharp drop off in deals in Europe in the period.
“Our first quarter in Europe was just bad,” said Moelis chief executive Ken Moelis. “There was not a lot of activity. It’s obvious that the uncertainty is causing issues … and it’s hard to believe that this is the natural state of deal mechanics in an economy that size,” he said.
Moelis reported revenue of US$138m in the quarter, down 37% from the year ago period.
The smallest shop, Greenhill, suffered the biggest decline in the quarter with revenue falling nearly 42% to US$51m. The investment bank was facing a tough comparison with a year ago, but the drop was steeper than analysts had expected. The decline also undid some of the work Greenhill did to restore investor confidence after being on the ropes in 2016 and 2017.
Greenhill was hurt by a lack of large transactions closing in the quarter and a generally slower pace of deal activity across the market.
“The sharp decline in equity values and the closing of financing markets in the fourth quarter had a significant impact on M&A activity, particularly outside the US,” said Greenhill chief executive Scott Bok.
Bok said Greenhill’s revenue increased during the quarter in every region but Europe.
Europe’s investment banks also reflected that trend. Revenues for advisory and underwriting at the biggest seven European investment banks fell 14% on average from a year ago, underperforming their US peers.
COMP RATIOS RISE
With equity values up and the financing markets reopened, Greenhill has seen a rebound in deal activity and expects a solid revenue performance for the full year, Bok said.
PJT was the only bank of the five to see a bump in advisory revenue in the quarter. The bank reported advisory revenue of US$105m up 1% from the year ago quarter.
“As we get further into 2019, we expect a strategic advisory momentum to be better reflected in our financial results,” said PJT CEO Paul Taubman. PJT is the youngest of the banks and has the smallest European footprint.
Lazard and Evercore reported first-quarter results the previous week.
As revenue slumped, most of the independent banks continued to pay bankers the same as they had before and the compensation ratio spiked.
At Moelis the ratio reached 65%, up from 58%. But the bank is not looking to cut expenses right now.
“If we looked forward and saw the revenues were not looking like they’d come up, you probably could do reductions in headcount,” Moelis said, beating back concerns about expenses. None of that is on the table right now, he said.