One month does not a quarter make. And that’s just as well.
As US banks reported strong fourth-quarter and full-year 2021 results and European banks began their announcements, January 2022 was brutal. Extreme secondary market volatility as investors absorbed the Federal Reserve’s strident messages over rate rises and balance-sheet reduction has not encouraged high volumes of trading activity: rather, the exact opposite.
Deutsche Bank analysts see a 20% decline in average daily volumes in the cash market for US equities in January 2022 compared with the first month of 2021, an 18% decline in corporate bond trading and a 13% decline across fixed income excluding government bonds, where volumes were up a modest 1%.
Primary market volumes and fees are easier to track, and the picture is even uglier. The Deutsche analysts track total global debt issue volume down 23% in the first month of this year compared with January 2021, with global equity issuance down 61% compared with the start of 2021 when Spac IPOs were still in vogue. Syndicated loans are down 80%.
Announced M&A is 6% higher than in January 2021. However, completed M&A, which is what generates the fees, is down 51%.
Deutsche Bank sees overall investment banking revenues tracking down 50% in January 2022 compared to the strong start in 2021
Fees don’t exactly track volumes because they vary between different types of transactions, but Deutsche Bank sees overall investment banking revenues tracking down 50% in January 2022 compared to the strong start in 2021.
“We're only a month into the year and pipelines were strong just a month ago so activity could snap back quickly in our view,” note the Deutsche analysts, led by Matt O’Connor, “if markets continue to stabilize.”
That, of course, is a sizeable ‘if’.
In the first year of the pandemic, debt capital markets fees were a bounty to investment banks as corporations drew down on credit lines, extended average duration of their bond liabilities and built cash reserves. Then equity capital markets picked up the baton in the second half of 2020 and the first quarter of 2021 with the extraordinary rise in special purpose acquisition companies. Finally, mergers and acquisitions took over and reached record levels in 2021, surpassing even the leveraged buyout boom in 2007 that preceded the great financial crisis.
Time will tell if January 2022 was merely a pause rather than the start of a steep correction in investment banking revenues. But it is worrying that all income streams are falling together in a month when clients of all types are particularly keen to kick off debt-issuance programmes.
Setting the tone
January 2021 set the tone for a record-breaking year. Investment banks will hope that the rest of 2022 bucks the January trend.
The theory is that bank net-interest margins will benefit handsomely from rising rates. But in late January, short rates were going up while 10-year rates were holding steady, so flattening the yield curve. Banks that fund short and lend long benefit from a steepening one.
Unconvinced by the improving NIM story, investors turned cautious on banks sensitive to markets and investment banking revenue.
While the S&P 500 index ended January down 5%, the stocks of leading investment banks did worse. JPMorgan stock was down 6% and Goldman Sachs shares fell by 7%. Investors did not like all the talk of rising costs as they worry about declining revenues.
In Europe, the banks with the biggest dependence on investment banking earnings are Credit Suisse – which might kindly be labelled as challenged right now, if not outright troubled – and Barclays. Credit Suisse was due to report on February 10; and by the time Barclays gets round to announcing full-year 2021 results on February 23, we will be almost two thirds through the first quarter of 2022.
The results themselves won’t garner much attention. But the outlook commentary for the rest of this quarter and for the whole of 2022 will have analysts and investors hanging on every word.