War and rate hikes undermine growth prospects for global investment banking business

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Global investment banking revenue is set to hit a hard landing as firms put plans on mergers and acquisitions and IPOs on hold amid fears of war in Ukraine and hawkish central bank policies.

Tighter financial conditions and widespread uncertainty regarding the ongoing conflict in Ukraine have created a real storm that is slowing client activity. The trend is poised to impact investment banking underwriting and advisory revenue in the first half of 2022 and possibly beyond. Year-to-date, deal volumes in the M&A, debt and equity markets have fallen to five-year lows, according to data from S&P Global Market Intelligence.

“So far, it seems the industry has had the worst of it all,” Eric Li, research director at the financial services analytics firm Coalition Greenwich, said in an interview, noting that revenues across all areas of business, including debt capital markets, equity capital markets and advisory services, were down. “There are no silver linings for any of the areas,” Li said.

War worsens prospects

Global investment banking revenue hit a two-decade high of $127.5 billion in 2020 and climbed further to $159.4 billion in 2021. Results for the two years were the strongest never recorded since 2000, according to financial markets data provider Refinitiv. At the start of this year, revenue fell by more than a third, according to Dealogic data.

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With central bank rate hikes on the horizon, a normalization of incomes following the pandemic-fueled boom of the past two years is not surprising, Li said. Still, the war in Ukraine could significantly weaken revenues in 2022, especially if the conflict drags on, he said.

Before the start of the war in Ukraine, the Greenwich Coalition estimated that global banking revenues would fall 10% to 25% year-over-year in 2022, citing the negative impact of rate hikes on economic growth. Li said it was “highly possible” that global banking revenues would now fall by up to 50% under the worst-case scenario as the war drags on.

Market jitters hit IPO and M&A numbers

Firms are likely to suspend issuance of new debt or equity until war-triggered uncertainty has subsided, which could hurt banks’ underwriting income in the meantime, said Maria Rivas, senior vice president of global financial institutions at DBRS Morningstar. The number of M&A and IPO deals has been trending down on a weekly basis since early March, Market knowledge the data shows.

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“Implied volatility right now is so high, and it’s making markets very jittery. It’s very difficult to price effectively in this environment,” Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said in an interview. Debt and equity issuance have slowed since the start of 2022, with weekly outflows from European stocks have hit all-time highs in recent weeks, Melson said.

Equity markets are expected to be the worst-performing investment banking sector in 2022 given the tough year-ago comparison and expected slowdown in activity this year, Li said. was the best year for IPOs worldwide since 1980, according to Refinitiv.

The revenue outlook for M&A advisory is uncertain, even though there is a strong pipeline of announced deals, as it is unclear how many deals will actually close while the war continues, Li said. kind of thing deters a lot of people from making really big decisions, like closing multi-billion dollar deals.”

Best 2nd half

Dealing and issuing in the primary market may regain some lost ground in 2022 if market sentiment improves and worries about war, rate hikes and commodity price inflation raw are decreasing, Melson said.

The markets are overstating expected rate hikes in particular, and some of the jitters will likely ease in the second half of the year when there is more clarity “on what the tightening cycle looks like from investors.” global central banks,” Melson said.

The US Federal Reserve announced its first rate hike in two years on March 16 and plans six more hikes by the end of 2022. The Bank of England raised its key rate in early February, while the European Central Bank assesses still options for a rate hike this year.

Banks also expect improvement as the year progresses. Decline in investment banking revenue at Deutsche Bank AG early 2022 reflects “more of a delay than a slump in business,” CEO James von Moltke told a conference in March. “Our feeling is that you’ll see activity return…as people adapt to a changed environment,” von Moltke said.

Absorbable Strike

Major European and US financial institutions have strong capital and liquidity positions and are well placed to absorb a decline in investment banking revenues, said Peter Nerby and Olivier Panissenior vice presidents at Moody’s Investors Service.

The business mix varies across major global investment banks, and direct exposure to Russian investment banking operations is negligible, according to Dealogic data. The volatility also presents growth opportunities in alternative business areas, such as securities sales and trading, Rivas said.

Even so, the banks are tight-lipped about their revenue prospects. Von Moltke, Ralph Hamers, CEO of UBS Group AG, and Thomas Gottstein, CEO of Credit Suisse Group AG, all declined to comment at conferences and investor days on expectations for investment banking earnings in the first trimester.

BNP Paribas SA, Societe Generale, Bank of America Corp., The Goldman Sachs Group Inc. and HSBC Holdings PLC also declined to comment when contacted by S&P Global Market Intelligence. JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. did not respond to requests for comment.

The progression of investment banking activity in 2022 will become clearer when the major institutions begin to report their first quarter results in the second half of April. “We have to wait to see what banks report in the first quarter and continue to watch developments carefully,” Rivas said.

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