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US banks expect big drop in revenue as dealmaking dries up

The biggest U.S. banks are expected to report the biggest drop in investment banking revenue in years next week as the dealmaking engine that helped Wall Street post record profits last year falters.

Banks started the year with a slowdown in transaction activity after a blockbuster 2021, supported by markets and widespread stimulus. The first quarter of 2021, in particular, was a lucrative three-month year as banks coined fees from a boom in IPOs of special purpose vehicles for acquisitions.

The slowdown was worse than expected. Bank executives have blamed Russia’s invasion Ukraine and subsequent market volatility. stock capital markets etc IPOs in particular, have slowed down dramatically in recent weeks.

“For the first quarter, we anticipated a likely 10 to 20 percent decline in capital markets revenues compared to a year ago [at the start of 2021], as the area about the banks. And now we’re down 30-50 percent. It’s significantly weaker,” said Matt O’Connor, head of large-cap bank research at Deutsche Bank.

JPMorgan Chase becomes first bank to report earnings on April 13, followed by Citigroup, Goldman Sachs and Morgan Stanley on April 14. Bank of America reports earnings on April 18th.

On average, these banks are expected to see a 26 percent drop in investment banking fees, according to Bloomberg estimates. On average, analysts are forecasting a decline in banks’ total earnings of around 10 percent.

Line chart of investment banking revenue in billions of dollars showing investment banking revenue declined sharply in Q1

Bank executives are hopeful that current market volatility will only delay deals closed later in the year, although there are doubts about how temporary this slowdown will be.

“With every week and month that goes by with this kind of market volatility and macroeconomic uncertainty, we grow more concerned. I think investors are probably more concerned than even the consensus estimates suggest,” said Jeff Harte, senior research analyst at Piper Sandler.

On a positive note for banks, trading revenues are likely to have held up better than many expected during the recent market gyrations and are expected to post smaller declines than advice to investment banks on deals.

At a conference in early March, Troy Rohrbaugh, JPMorgan’s head of global markets, said the bank’s quarter-to-date trading performance was down 10 percent.

“In our view, commodities trading is the best-performing asset class [Goldman Sachs] the main beneficiary as it is the largest commodity player by revenue in our coverage,” analysts at JPMorgan wrote in a research note this month.

Banks entered 2022 with the expectation that any slowdown in investment banking or trading would be offset by a much-anticipated move in the federal reserve raising interest rates for the first time in years; and rising demand for credit as cash reserves from pandemic-era government stimulus programs dwindled.

Higher interest rates should help banks make more money on the loans they make, and some analysts are hoping banks will raise forecasts for the amount they will make from net interest income in 2022.

“The bright spot should be net interest income as loan growth really accelerated during the quarter,” said Jason Goldberg, banking analyst at Barclays.

However, the rapid pace at which the Fed is now able to raise interest rates must be combated inflation fuels fears that the US economy could slip into recession.

“While banks face several potential tailwinds, including higher interest rates and accelerating credit growth, war-related tail risks have increased significantly, including a higher likelihood of a recession as the Fed quickly hikes rates to lower inflation ‘ wrote analysts at Morgan Stanley in a research note.

https://www.ft.com/content/a1f73759-4ebb-42e7-9ae2-382ae84d8b90 US banks expect big drop in revenue as dealmaking dries up

Adam Bradshaw

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