JP Morgan expects investment banking fees this quarter to fall by 45%–50% from a year earlier after a slump in dealmaking, and executives at Citigroup and Bank of America also warned that fees across the industry could halve. Trading revenues have held up better, and JP Morgan forecast they could be up about 5% from a year ago.
Executives said the bleak first half of the year for advisory and underwriting has continued in the third quarter, although the slump is compared with record levels a year ago. Equity capital markets fees in the first eight months of this year were down 68% from a year earlier, while fees from debt underwriting were down 25% and M&A fees were down 15%, Refinitiv estimated. Debt issuance has picked up in recent weeks.
Executives said concerns about inflation, recession, interest rates, energy prices, supply chains and Russia's invasion of Ukraine were all contributing to wary and volatile markets, and deterring corporate chiefs from looking at deals.
Daniel Pinto, head of JP Morgan's corporate and investment bank, said investment banking fees "will be around 45%–50% down".
But Pinto said it had been "a solid quarter" for trading revenues and they should be up about 5% from a year earlier. Pinto, speaking via webcast at the Barclays financial conference in New York, said the performance was weaker in equities and stronger in fixed income.
JP Morgan's FICC and equities trading revenues in the third quarter of 2021 were US$6.3bn, so the guidance suggests trading revenues will be around US$6.6bn this quarter. Investment banking fees totalled US$3.3bn in Q3 2021, indicating they will be around US$1.75bn this quarter. This continues trends seen in the first half, when JP Morgan's markets revenues were up 4% from year-earlier levels and investment banking fees were down 44%.
JP Morgan kicks off Q3 results for US banks on October 14.
Rates and FX up
Citigroup finance director Mark Mason offered a similar view. "In investment banking, in light of the volatility and uncertainty, wallets are down some 50% or so, and we’re down in tandem with that. We think we’ll end the quarter generally around where the wallet ends, so investment banking will see that pressure," Mason said at the same conference.
He said Citi's Q3 trading revenue is on track to be down 5%–9% from a year ago. “In markets, quarter-to-date we're running down in the mid to high single digits [percent] and we’ll likely end the quarter there, although there are a few weeks left," he said.
In FICC, the performance in foreign exchange and rates trading had been strong but was offset by weakness in spread products. In equities trading, Mason said levels were closer to those in 2019, with last year's revenues swelled by strong equity derivatives trading.
Investment banking divisions are seeing a significant decline in revenues as dealmaking has stalled and the M&A backlog starts to dry up, said Michael Turner, head of competitor analytics at Coalition Greenwich, which also expects a year-on-year fall of about 50% in Q3.
Turner said volatility in fixed income markets has dropped somewhat compared with the first half of the year, but he said it remains a constructive environment for trading macro products, such as those linked to interest rates and FX, with revenues expected to rise by 10% to 20% from the previous year.
Bank of America chief executive Brian Moynihan was in tune with his peers. "In the near term in investment banking we won’t look a lot different to the market because the financing side has taken a hit, and that’s our strong suit," he said.
Moynihan said the deal pipeline is strong and bankers are optimistic that activity will pick up when markets stabilise, however. "The pipelines are very full and there’s a lot of activity that’s been held waiting for some stability ... It’s not theoretical deals that could happen, it’s stuff that’s ready to go, but it will require the markets to stabilise to have that happen," he said.
UBS's new finance chief Sarah Youngwood agreed there had been a continuation of Q2 trends in the current quarter. "You're seeing the wallet continuing to be very down for the industry, whether it's advisory or capital markets, so the pool is just really down," she said.
Additional reporting by Christopher Whittall
