Investment banking revenues plunge to 13-year low

Bleak start to 2019 exacerbates industry’s downward trend since crisis

Revenues at the world’s top investment banks plunged to a 13-year low in the first half of 2019 as geopolitical tensions, slowing growth and low interest rates compounded a structural decline that set in after the financial crisis. The 12 biggest US and European investment banks generated $76.8bn in revenue from their trading and advisory operations during the six-month period, down 11 per cent from 2018. It was the slowest first half since 2006, according to the latest data from industry monitor Coalition. The banks had individually reported poor second-quarter earnings for their markets and investment banking divisions, including an 18 per cent fall in fixed-income revenues at Morgan Stanley and a 32 per cent decline in equities revenues at Deutsche Bank, which is in the process of shutting its stock trading business. Across the group, the most eye-catching fall was in equities, where revenue dropped 17 per cent year on year across all regions because of significant declines in client demand for derivatives and prime brokerage services, the business of lending to and trading for hedge funds. The Mifid II European rules on investor protection have also made equities a more challenging business, prompting speculation that other European banks could follow Deutsche’s lead, leaving equities trading to Wall Street’s powerhouses. Fixed-income and commodities trading also fared poorly in the first half, falling 9 per cent, partly because of lower interest rates, while revenue from M&A advisory and capital markets declined 8 per cent as cautious companies sold fewer bonds and equity listings stagnated. Christian Bolu, banks analyst at Autonomous, said that investment banks were seeing mixed fortunes so far in the third quarter. Equities volumes were up 5 per cent year on year in the US and down by low double digits elsewhere, while fixed-income volumes were up 6 per cent year on year globally and investment banking revenues were down 11 per cent. Investment banks, particularly in Europe’s smaller and more fragmented markets, are coming under increasing pressure from investors as their profitability dwindles amid higher capital requirements, increasing digitisation and ultra-low or negative interest rates. On average, the stocks of European banks have posted double-digit falls every year since 2016, with many of the biggest drops at those that have maintained large trading operations. France’s two largest banks, BNP Paribas and Société Générale, earlier this year slashed their financial targets and promised to cut a combined €850m of costs and thousands of jobs from their investment banks after a run of poor results. Barclays, led by former JPMorgan executive Jes Staley, is the last European bank trying to compete as a “bulge-bracket” full-service global player. Nevertheless, Mr Staley has spent the past year fending off an attack from a prominent activist investor who is urging that Barclays’ investment bank be radically shrunk. US banks have been coming under pressure as well. Citi is cutting hundreds of jobs in its trading business in response to challenging market conditions, while Goldman Sachs has promised a step change in profitability at its fixed-income trading business under a strategic plan to be unveiled in January. The number of front-office, client-facing employees in the industry declined for a tenth consecutive year, falling 3 per cent to 50,400 year on year, and down from 56,700 in 2014. However, “the overall reduction in expenses could not offset the decline in revenues,” Coalition said. Coalition forecasts that return on equity, a key measure of profitability, will fall to an average of 6.7 per cent this year, from 9.5 per cent in 2016. Operating margins have similarly narrowed to the worst in four years.