Global investment banking revenue falls in the first quarter
Declining primary debt market volumes and associated revenue declines raise a warning flag ahead of bank results for another poor quarter in FICC.
Global investment banking revenue in the first quarter of 2014 declined by 6% compared with the first quarter of 2013, coming in at a total of $17.7 billion. There were wide differences between the main sources of fee earnings for arrangers and underwriters of financing.
Syndicated loans and debt capital markets (DCM) both recorded substantial year-on- year decreases in revenue, down 21% and 17%, respectively, according to figures from Dealogic, while by stark contrast equity capital markets enjoyed a 21% year-on-year increase to $4.6 billion. IPO revenue of $1.6 billion in the first quarter of this year was up 87% from the same period in 2013.
For advisers, M&A revenue was on par with the same period last year at $4.2 billion.
DCM remains the single biggest source of revenue for investment banks, but saw substantial declines, notably in US high yield where revenues were down by 37%. Overall global DCM volumes came in at $1.7 trillion for the first quarter, the lowest first-quarter amount issued since 2008. One bright spot was FIG and covered bonds, where issuance in Europe amounted to the highest quarterly volume on record.
Overall, it looks as if the primary market revenue trends are likely to be mirrored in secondary market performance when banks eventually release their first-quarter results.
Matt Spick, analyst at Deutsche Bank, says the first quarter of 2014 looks likely to have been another poor one for fixed income, currency and commodities (FICC) players. He expects FICC sales and trading revenues to be down by 15% to 20% compared with the first quarter of 2013, with secondary equity volumes modestly up and FICC volumes down.
Spick notes: “The latter is interesting as we move onto standardization and exchange trading – SEFs et al. We see no volume increases offsetting margin compression, with the overall friction in the system up, not down, as a result of regulatory and reporting costs. As for bid-offer spreads, both FX and rates volatility were down in the first quarter, which correlates with weaker FX and rates revenues.”
Such a bad quarter would raise worrying questions for many banks after an overall 13% decline in the FICC revenue pool throughout 2013. While the recent recovery in primary equities has been a welcome relief and secondary equity volumes might well be holding steady, these are not such dominant businesses for the wholesale banks.
Citi European banks analysts point out in a note to clients: “Wholesale bank valuations are largely being driven by their FICC dependence. Markets remain deeply sceptical of the FICC business model — revenue outlook, profitability, market positioning, as well as litigation risks.”
Ahead of the earnings season, the noises from inside banks are not encouraging, say the Citi analysts: “Recently, various management teams have indicated a weak start to FICC, with double-digit declines.”
In terms of stock recommendations, wholesale bank analysts have for some time been favouring banks with larger equities businesses, such as UBS and also to some extent Société Générale. Credit Suisse also has a similarly sized equities business to its FICC business.
For FICC banks with larger rates businesses, such as Deutsche and Barclays, it remains to be seen if they can capture a benefit in the quarters ahead from returning volatility as the US returns to more normal interest rates just as the ECB continues its flirtation with possible quantitative easing.
Meanwhile, much depends in Europe on the capacity of the financial system to shift towards one where investors in DCM become more important suppliers of credit to corporate borrowers of all sizes.
Ignoring secondary market revenues, and looking just at fees from arranging debt and equity finance and advising on M&A, the top five banks accounted for 34% of global investment banking revenue in the first quarter of 2014, the second highest combined first-quarter share for the top five since 2007 (36%), according to Dealogic.
JPMorgan continued to lead the global IB revenue ranking for the sixth consecutive first quarter with $1.5 billion and a wallet share of 8.2%. Goldman Sachs moved up to second (7.5%) while Bank of America Merrill Lynch ranked third (6.8%).