Here is Some WallStreet-Friendly HorseManure Worth-Loathed Reading:
Investment banks: Downhill for the rest of 2012?
After a mixed first quarter, the question on the minds of many senior bankers is not whether things will get worse over the rest of the year, but by how much. A glance at the quarterly pattern of revenues and earnings for investment banks over the past few years suggest the answer is not pretty. Eight of the large investment banks that have so far reported for the first quarter (Bank of America, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, and Morgan Stanley), did not get off to a great start. In dollar terms, they posted an average fall in revenues from capital markets of 5% on the same period last year, according to my calculations, and aggregate pretax profits were down by a little more than 6%. Fees from investment banking were down by 16% and equities trading by 8%. The only bright spot, at least in relative terms, was fixed income trading, which was down by less than 1%. The most positive spin one could put on the results were that they were a significant improvement from the miserable last three months of last year. Sadly, it is almost certainly downhill from here, for at least two reasons. First, the banks warned that there are already signs that rumblings in the eurozone crisis had persuaded many corporates and investors to flick the risk switch firmly to the off position again. Equity trading volumes, already thin in the first quarter, have ticked downwards, while credit spreads have again widened. Any hopes for a revival in the IPO or M&A markets have been shunted back to late spring at best, while the debt capital markets have already cooled. But to compound this weakness, the second reason is that revenues in investment banking are traditionally seasonal, with sales and trading in particular tending to run ahead in the first quarter (as investors reallocate assets and issuers try to raise as much money in the capital markets at the start of the year as they will stand). Over the past three years at these eight investment banks, the first quarter has on average accounted for 38% of sales & trading volumes for the year (fixed income trading is a slightly higher proportion than this: last year 42% of annual revenues came in the first three months of the year). All in, over the past three years, 35% of revenues from capital markets came in the first quarter along with just over half of the industry’s profits. The second quarter of the year has traditionally seen a sharp slowdown relative to the first: while investment banking revenues edge up by a few percent, equities trading falls by around one quarter and fixed income by nearly 40%. There is little reason to suggest that this year will be any different. Indeed, given the severity of concerns over the European economy, with many countries slipping back into recession, the retreat in the second quarter could be even worse than usual. With investment banks struggling to bring their stubborn cost bases under control, their performance is highly sensitive to sharply lower revenues. The only positive for banks is that the second half of 2011 was so bad that this year will struggle to live down to it. Revenues across these eight banks fell by 45% compared with the first half and they turned a combined pretax profit of $33bn in the first six months into a loss of $1bn. So even if the first quarter turns out to be the high point for 2012, if you project that the rest of this year follows the same pattern as the past few years, revenues will only be a few percent lower than last year and fixed income could even finish the year up. The question then comes down to costs: in order for the industry to make the same level of profit as in a pretty dire 2011, it would have to cut costs by between 12% to 15%. With costs down just 6% in the first quarter, that looks unlikely. Perhaps investment banks – and their owners – will have better luck in 2013? — William Wright is a writer and commentator on investment banking and financial markets. He can be reached at email@example.com or on Twitter on @williamw1