A month is not a quarter. And that’s good.
While US banks released strong fourth quarter and full year 2021 results and European banks started their announcements, January 2022 was brutal. The extreme volatility in the secondary market as investors absorbed strident messages from the Federal Reserve on rate hikes and balance sheet shrinkage did not encourage high volumes of trading activity: rather, it is exactly the opposite.
Deutsche Bank analysts see a 20% decline in average daily volumes in the U.S. cash market in January 2022 compared to the first month of 2021, an 18% decline in corporate bond trading and a decline 13% in fixed income excluding government bonds, where volumes rose a modest 1%.
Primary market volumes and fees are easier to track, and the situation is even uglier. Deutsche analysts say total global debt issuance volume is down 23% in the first month of this year from January 2021, with global equity issuance down 61% from the start of January. 2021, when Spac IPOs were still in vogue. Syndicated loans are down 80%.
Announced mergers and acquisitions are 6% higher than in January 2021. However, completed mergers and acquisitions, which generate the fees, are down 51%.
Deutsche Bank sees overall investment banking revenue fall 50% in January 2022 from strong start to 2021
Fees don’t exactly track volumes as they vary across different types of transactions, but Deutsche Bank sees overall investment banking revenue down 50% in January 2022 from a strong start to 2021.
“We are only a month into the year and the pipelines were strong just a month ago, so activity could pick up quickly in our view,” Deutsche analysts, led by Matt O’Connor, “if the markets continue to stabilize”.
This, of course, is an important “if”.
In the first year of the pandemic, debt capital market fees were a bonus for investment banks as companies tapped into their credit lines, extended the average duration of their bond obligations and built up cash reserves. Then the equity markets took over in the second half of 2020 and the first quarter of 2021 with the extraordinary rise of special purpose acquisition companies. Finally, mergers and acquisitions took over and reached record levels in 2021, even surpassing the LBO boom in 2007 that preceded the Great Financial Crisis.
Time will tell if January 2022 was just a pause rather than the start of a sharp correction in investment banking earnings. But worryingly, all revenue streams are falling together in a month when customers of all types are particularly keen to launch debt issuance programs.
January 2021 set the tone for a record year. Investment banks are hoping the rest of this year bucks January’s trend.
The theory is that banks’ net interest margins will benefit generously from higher rates. But at the end of January, short rates rose while 10-year rates held steady, thus flattening the yield curve; banks that finance in the short term and lend in the long term benefit from steepening.
Unconvinced by the improvement in the NIM, investors were wary of market-sensitive banks and investment banking earnings.
While the S&P 500 index ended January down 5%, stocks of major investment banks fared worse. JPMorgan stock fell 6% and Goldman Sachs stock fell 7%. Investors didn’t like all the talk of rising costs as they worried about falling revenues.
In Europe, the banks most dependent on investment banking revenue are Credit Suisse – which could be kindly characterized as challenged at the moment, if not downright troubled – and Barclays. Credit Suisse was due to report on February 10; and by the time Barclays arrives to announce full year 2021 results on February 23, we will be almost two-thirds through to the first quarter of 2022.
The results themselves will not attract much attention. But commentary on the outlook for the rest of this quarter and for all of 2022 will have analysts and investors hanging on every word.