Wall Street’s investment banking boom comes to a halt on conflict

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NEW YORK: Investment banking executives started this year with the belief that the records their traders broke in 2021 would soon be broken. Things changed quickly.

The pace of large-scale initial public offerings (IPOs) and mergers and acquisitions (M&As) has come to a halt in recent weeks as Russia’s invasion of Ukraine plunged markets and wider economies into chaos. This is particularly striking in Europe, where a senior trader expects M&A fees to fall by a third and equity underwriting income to fall even more sharply.

Of course, the conflict has disrupted far more consequential things than the flow of Wall Street charges, but the ripple effects of the war are far-reaching.

As companies globally block public offerings, fundraising or strategic mergers, banks are losing business they had hoped to deliver a soft landing at the end of a two-year trade boom. Wall Street’s five largest lenders generated record revenue of US$55 billion (RM230.32 billion) in 2021 through the placement of equity and bond offerings, as well than advice on mergers and acquisitions.

This was 40% more than the previous year. European lenders also benefited: Barclays Plc posted its highest bank charges in at least seven years, helping the lender achieve a record annual profit.

Russia’s attack, however, broke the market in many areas. Since the start of the invasion on February 24, only US$110 million (RM460.64 million) of IPOs have been valued on European exchanges, compared to around US$2.8 billion (11, RM7 billion) during this period last year, according to data compiled by Bloomberg.

In the same weeks in North America, IPOs rose from US$24 billion (RM100.5 billion) a year ago to US$1.7 billion (RM7.11 billion). ).

The uncertainties created by Russia’s invasion of Ukraine encourage companies “to be financially conservative and hoard cash rather than make deals,” said Ismail Erturk, senior lecturer in banking at the University of Manchester. “There is a demand for hedging and risk management at the enterprise level and these products can be sold at a premium. But I doubt that such risk management products can replace the loss of revenue resulting from the conclusion of agreements. »

The STOXX Europe 600 Banks index has fallen by about a fifth since the start of the war.

Even before the invasion, the deal boom had begun to show signs of fatigue, particularly in Europe, as economies slowly navigated the pandemic. Today, rising commodity prices and volatile markets are creating more problems for clients trying to assess the effects of prolonged conflict.

Traders are also facing these huge price swings as they try to live up to their exceptional pandemic-era performance that has buoyed banks’ profits for the past two years. While banks are yet to report results for the past few months, a slew of macro-focused hedge funds and commodity bets have gained big – and lost big – in recent moves.

JPMorgan Chase & Co’s chief commercial officer said on Tuesday that many customers were under “extreme stress” related to the impact of Russia’s invasion of Ukraine and the resulting sanctions from the United States and of the European Union. At JPMorgan, market revenue was down 10% this quarter on Friday, but “things have changed a lot since then,” Troy Rohrbaugh said. A senior executive who works for a U.S. bank, who asked not to be named while discussing private information, said trading volumes in fixed income, currencies and commodities held steady as markets credit were under severe strain.

Traders face a crisis scenario similar to 2020 where there is little liquidity, while some customers face margin calls, the person said. —Bloomberg

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