Banking News

Investment Banks Make Hay Before Sun Stops Shining

(13 April 2020 – Australia) Up to A$7 billion worth of equity raisings in Australia since March have propped up investment banks revenues suffering from slumping merger and acquisition (M&A) fees.

UBS took top spot on Australia’s investment banking fee league tables according to Refinitiv, with A$20.8 million in related fees and a 7.5 percent overall share. Goldman Sachs attains a 6.5 percent market share ahead of NAB with a 5.4 percent share. Expectations are that the deal volume in the months ahead will only increase in Australia as corporates pore over their balance sheets to withstand the COVID-19 enforced shut down for an as yet undefined period. In Q1 2020, deals withdrawn from the market increased 50 percent compared to Q1 2019, with 21 deals worth a combined US$6.8 billion taken off the table, primarily due to the coronavirus. Real Estate accounted for 84.3 percent market share in terms of deal value. According to data collected by Refinitiv, the A$438 million generated in Q1 2020 for investment banking overall was down 25.4 percent year-on-year. It has been the slowest start to a year in almost two decades. Fees for completed M&A were down 40.9 percent while fees from equity capital markets (ECM) activity were down 16.4 percent. DCM fees fell 11 percent and syndicated lending fees slid 43.5 percent.

Globally, European lenders are seen as particularly vulnerable as Wall Street majors prepare to snare market share. US investment banks earn almost half their revenue from equity raisings, with the remaining proportion made up of trading income, debt capital markets (DCM) and to a lesser extent M&A deal flow.  Most global investment banks commonly split revenue evenly across investment banking, trading and capital market operations. JPMorgan is the most profitable US lender, with market commentators suggesting the group is likely to use the crisis to take further market share from smaller European lenders.

Unlike in the 2008 Global Financial Crisis, banks can no longer compensate for declining profits by cutting fixed costs because regulatory, compliance and IT costs are no ingrained. Additionally, “in the midst of a public health emergency, banks are unlikely to pursue cost-cutting through imposing redundancies” a report by the European Central Bank quoted. HSBC has already said it will delay the “vast majority” of redundancies in its restructuring. Some banks may be pushed to sell assets or exit business lines, the report added. Within investment banking, a slowdown in deal making and capital markets is likely to be partially offset by a surge in trading revenue during the initial volatility. Transaction banking and securities services will likely be negatively impacted by record-low interest rates crimping margins and intensifying ‘negative jaws’, comparing income and operating expenses growth trends. If expense growth exceeds gross income growth, negative jaws occurs.

“While the banking industry has built up robust capital and liquidity buffers since the financial crisis, returns have never been lower entering a major stress event and banks’ first line of defence is pre-provision profitability,” said Morgan Stanley Head of European Financials Equity Research, Magdalena Stoklosa. “The pressure on earnings could reveal structural weaknesses in some business models, the performance gap will be wide. The biggest single driver of profitability is scale” Ms Stoklosa added.