- Investment banking fees plummeted in the first quarter as IPOs and SPACs ground to a halt.
- Wall Street’s biggest banks are also facing pressure from shareholders to slash ballooning expenses.
- The combination has some bankers worried about cuts to their compensation — and job losses.
If there was one unifying thread from the latest spate of bank earnings, it was that the go-go days investment banking experienced during the pandemic are officially over.
On Wednesday, JPMorgan said investment banking fees fell 31% in the first quarter compared to the same period in 2021. On Thursday, Wells Fargo, Citi and Goldman Sachs followed up with similarly dire numbers, saying their investment banking fees fell 21%, 43%, and 36% respectively.
The onslaught of bad news regarding M&A, IPOs, and other investment banking business has left some bankers fretting about their jobs and bonuses. The concerns follow a dealmaking frenzy that led to soaring headcount and compensation in 2021 — as well as hard questions from shareholders over ballooning expenses.
“If revenues are down, you’re going to end up with some difficult decisions,” one equity-capital-markets banker who works at one of the US’ largest lenders previously told Insider before earnings were released.
“There’s already pressure on the expenses side with investments in tech and big bonuses. So the usual first step is lowering the bonus pool, and if it continues getting worse, then the cuts will come” this banker said.
A second ECM banker pointed to recent cutbacks at UBS in Europe as an example of what could happen in the US unless deal flow picks back up.
“The honest truth is, if things don’t turn around in equity markets, this is going to happen at banks,” this person said before earnings, who also requested anonymity to speak freely about his anxieties over cutbacks.
The business of stock underwriting was hit particularly hard in the first quarter thanks to the triple threat of inflation, the war on Ukraine, and rising interest rates. Companies looking to go public have put plans on hold in hopes that roller-coasting stocks will settle.
On Thursday, executives at some banks said that their pipeline of deals remain robust, but still acknowledged that the days of record transactions (M&A, for one, hit a record $5.9 trillion globally in 2021) are gone.
“No one knows, obviously, where the macro environment goes as we go forward,” said Goldman Sachs CEO David Solomon. “But when you look at the volumes and the levels of 2020 and 2021, we’ve said repeatedly that those volumes were at levels that were not sustainable and are a reflection of some of that monetary and fiscal policy.”
Bank executives were also reluctant to predict a worsening of the business environment — or a
recession
— even as they highlighted macro risks.
JPMorgan Chase CEO Jamie Dimon told analysts Wednesday he doesn’t see a recession coming in 2021, adding that “I can’t forecast the future any more than anyone else.” But inflation,
Federal Reserve
tightening, and the war in Ukraine present key economic risks, Dimon added.
Against a fraught macroeconomic backdrop and slowing deal flow, investment banking talent might be one area where banks can control costs, experts said.
“You’ve got higher labor costs and top-line growth is tough to achieve in a challenging capital-markets landscape,” Matthew Miskin, the co-chief investment strategist at John Hancock Investment Management, previously told Insider ahead of earnings. “The biggest cost pressure is wages. Banks just went through an exercise of increasing a lot of wages. That’s fine if the revenue is there to make that work. But there’s only so many levers they can pull.”
Solomon’s sentiment, meanwhile, was echoed by Citigroup CEO Jane Fraser. Fraser told analysts Thursday that Citi’s deal pipelines are “healthy,” but said that “we don’t expect robust activity in the capital markets to resume in the industry until the geopolitical situation and client sentiment improve.”
In good news,
volatility
in global markets has boosted bulge bracket revenues in other business areas. Foreign exchange and emerging markets trading revenues at JPMorgan saw a boost in the first quarter, while Citi said it similarly saw gains in FX and commodities trading.