Bankers see a shake-out as the record-breaking deal boom slows down
Just as the end of the Covid-19 pandemic has repeatedly failed to arrive as predicted, so too has the end of the boom for investment banks. Almost every quarter over the past two years, bank leaders have said it can’t last. But it has.
After record-breaking profits and bumper bonuses expected for 2021, things look certain to slow down in 2022. Yet to most observers, the outlook still appears bright compared with most of the period since the financial crisis.
Analysts at Keefe, Bruyette & Woods reckon that trading revenues at the big European banks will fall 7% in 2022 while the cooling M&A boom will shrink investment banking revenues by 18%. For the Wall Street banks, KBW forecasts that trading revenues will be down a bit more while investment banking will be a bit more resilient.
Yet despite the falls, European trading revenues are still forecast to be 14% above 2019 levels and investment banking 27% higher.
READ Cost-cutting and bumper revenues help EU banks beat 2021 targets
One of the big surprises in recent years has been the strength in fixed income trading, which picked up before the pandemic, after years of retrenchment following the financial crisis, and has been buoyed by the flood of liquidity during Covid.
It is expected to remain pretty strong in 2022 and should be helped by rising interest rates in the UK, if not in the eurozone. The pessimists think it remains artificially high. But the bulls believe it is close to a sustainable level and reckon that while it will remain cyclical, the swings will be less marked than in the past. Is this the new normal? Nobody really knows.
What certainly is the new normal is the continued loss of market share by the European banks to the Wall Street giants.
In investment banking, this was highlighted by the fate of BNP Paribas, which in 2020 clawed its way up to third in the revenue rankings in Europe, ahead of Morgan Stanley, Citi and Bank of America. But last year, the Americans reasserted their dominance, taking the top five spots ahead of BNP and Barclays, which moved up one place to seventh, according to Dealogic.
This is a disappointing result for BNP, which has been investing heavily both on the investment banking side and in trading, where it absorbed Deutsche Bank’s prime broking business and more recently agreed to take on Credit Suisse’s hedge fund clients.
Some insiders hope that more resources will come their way following BNP’s long-awaited disposal of its Bank of the West US retail business for $16bn. But analysts at KBW say any further rebalancing of the group towards the corporate and investment bank would not be welcomed by investors.
As revenues dip this year, a big focus for all investment banks, especially for the less profitable Europeans, will be costs. There is huge pressure on technology-spending as banks grapple with their legacy systems, seeking to stave off the threat from nimble fintech challengers.
Meanwhile, wage bills soared in 2021, not only because of bonuses but also increased recruitment and the ramping up of salaries in an attempt to stem an exodus of junior staff.
Although many staff have complained of intolerable workloads during the deal frenzy, some insiders say that quite a bit of fat has built up during the boom that they expect to see cut back when activity calms down.
READ Junior burnout crisis will roll into 2022 as deals fever continues, senior bankers say
In particular, they say that in some banks, the response to Brexit has led to duplication of roles in the UK and the EU. “This was tolerated when everyone was so busy and it was difficult to move people around. But once things return to normal, there will be a shake-out,” says one bank adviser.
London-based banks are also expecting increased pressure from EU regulators to locate more staff and capital in the EU. New moves are expected to be demanded following a review by the European Central Bank, which is due to be completed in the next few weeks.
Although this will be a big deal for the people involved, and is likely to attract continued media attention, Brexit and its associated costs are now a minor issue for the leading banks.
Much more important are the outlook for inflation (including the pressure on their own wage bills), central bank policy and market conditions in general. Although most bank strategists (with the exception of Bank of America) are pretty bullish about equity markets, some senior City figures are much more cautious. They find the recent falls in many of the hottest US technology stocks unnerving.
Says the head of one City firm: “If the markets hold up, then we should be looking at another good year. If they don’t, and there is a real chance they won’t, then all bets are off.”
To contact the author of this story with feedback or news, email David Wighton
