Falling rates usually boost asset valuations, financial markets, capital raising and M&A. No wonder, then, that sell-side analysts publish thousands of pages each day of excruciating detail on how each new data release might impact the chances of central banks lowering policy rates.
They are obsessed because this is the key driver of their own business.
Back at the start of February, bond market investors had been pricing in 140 basis points of cumulative US Federal Reserve rate cuts over the next 12 months. They are now pricing in just 100bp by April 2025, according to analysis from BNY Mellon.
However, even while concern grows that persistent inflation might delay cuts further or that the next move even could be up, the investment-banking business is already recovering.
Dealogic numbers show global investment-banking revenues 11% higher in the first quarter of 2024 compared with the first quarter of 2023, with revenues in the biggest regional market, the US, up 29% year on year and a 15% improvement in Europe.
Equity capital markets bankers in the US and Europe have enjoyed their highest first-quarter revenues since the banner year of 2021, with the revival of high-margin IPOs in the US bringing a near doubling of ECM revenues there compared with the first three months of 2023.
European investment banks also benefited from a near doubling of revenues from high-yield DCM in the first quarter.
Benjamin Goy, analyst at Deutsche Bank, notes that “syndicated loan volumes for banks are up 19% year on year in the first quarter of 2024, confirming that banks are back into the mix as a financing option. The jigsaw pieces seem to be falling one by one for the capital markets-focussed banks for a broad-based fee recovery.”
Cloudy picture
Mergers and acquisitions revenues have been slower to recover. Partly that is because the boards of potential acquirers want to feel certain that stock markets will not punish them unduly for announcing deals.
Global M&A revenue was down 10% year on year for the first quarter of 2024.
But, unlike with debt and equity capital markets, the long gap between the announcement of M&A deals and closing, which is when advisers get paid, clouds the picture here.
And a revival in DCM revenue – often starting with investment-grade debt primary markets, which have been booming for several quarters – can be a leading indicator of an uptick in both ECM and M&A.
Big deal announcements are coming thick and fast once more.
In January, technology company Synopsys announced an agreed $35 billion cash and stock offer for Ansys. Capital One announced its agreed, all-stock $35.3 billion deal for Discover – a transaction that might transform the US credit card business – in February.
At the start of April, Silver Lake announced a $13 billion bid to fully take private Endeavor, the sports, media and talent group with a total enterprise value of $25 billion.
Dealogic data shows a 25% increase in M&A deal announcements in the first quarter compared with the same three months in 2023.
Jefferies reported first-quarter earnings just before the Easter break, announcing its third-best quarter ever for capital markets revenues, thanks to strong performance in ECM and leveraged finance.
Even as the market turns, deal arrangers still have to scrap for business
However, even as the market turns, deal arrangers still have to scrap for business.
Richard Handler, chief executive of Jefferies, and Brian Friedman, the firm’s president, stated that investment-banking net revenues for the first quarter came in at $740 million, up 31.4% from the same quarter last year, primarily due to improved M&A and equity underwriting activity “reflecting our market share gains”, against what they call only “modest improvement in the market”.
The other big US banks will start to report first-quarter earnings from the end of this week, with their European peers eventually getting round to it when we are most of the way through the second quarter. Most have been cutting investment-banking staff, as they so often manage to do just before they need to start hiring them back.
Known unknowns
The question for bank management teams and boards of directors is not so much whether investment-banking revenue will revive. This is a cyclical business. It will. It already is.
The unknown is what impact any revival will have on their stock-market valuations. Improving net interest margins have driven the rise in bank share prices. But buying back shares looks a better way to close valuation discounts than investing in capacity to generate what are regarded as low-quality earnings.
Deutsche’s Goy, for one, is keeping a lid on the excitement.
“While we are reasonably constructive on investment-banking revenues into 2024 and expect a revival of fees after two tough years, we note that none of the capital markets-heavy banks feature in our latest top picks.”