Global investment banks are bracing themselves for a dismal second half, with further cuts in costs and staff, after a sharp drop in dealmaking and capital markets activity pushed down fees in the second quarter to their worst level in three years.
Yamada Taro | Photodisc | Getty Images
The dearth of transactions drove down advisory fees from mergers and acquisitions as well as debt and equity issuance to $32bn in the first half, a fall of a quarter on the first six months of 2011, according to data from Thomson Reuters.
“2012 is not going to be a great year by any means,” Christian Meissner, global head of investment banking at Bank of America Merrill Lynch, said. “There might be brief bursts of activity and the odd good month, but we really need the macro issues to be solved.”
The loss of confidence has renewed internal debates at banks about whether they will need to wield the axe on costs even further in their advisory divisions, which are an important but not dominant revenue driver.
Mr Meissner said: “Many banks think about their cost base in such a difficult environment.”
But with staff levels having already been cut significantly in the past few years, some banks could opt to pull out of entire business areas where they are no longer able to justify the fixed costs.
Thomas King, head of investment banking in Europe, Middle East and Africa at Barclays, said: “A number of banks have come to the point where they will have to make important structural decisions re-evaluating their overall business model.”
The first-half decline was largely due to a sharp drop in equity issuance and in M&A. Activity in the latter in the first six months was down 24 per cent to $898.5bn year-on-year, according to data from Mergermarket, the M&A intelligence service, setting a course for the lowest global yearly total since 2004.
With fee levels in previously buoyant debt capital markets also falling by 42 per cent between the first and second quarters, many bankers have given up on the optimism they still had at the start of the year.
They say a combination of the eurozone crisis, the economic slowdown in large Asian economies and the upcoming US presidential election will continue to weigh on corporate sentiment.
Chris Ventresca, co-head of North America mergers and acquisitions at JPMorgan, said: “All of these events are linked globally. No one is immune from a crisis in one part of the world, and there is a belief that it will spill over into other regions.”
The first half figures came as analysts have been reducing their earnings estimates for investment banks’ second-quarter results, due next month.
Late on Wednesday, Citigroupslashed its expectations for GoldmanSachs’ second-quarter earnings by 70 per cent to 80 cents a share. Citi analyst Keith Horowitz said he expected sluggish trading in equities and fixed income to weigh on results.