Life has been getting busier for investment bankers, but dealmakers aren’t cashing any checks yet. A stream of big-ticket merger and acquisition announcements this year bodes well for future revenue and bonuses, but no one gets paid until deals are completed. And that might not happen until late 2024 or even next year.
Second-quarter revenue at big investment banks is expected to continue the strong recovery from the washout that was 2023 when US lenders kick off the reporting season on Friday. But just like in the first quarter, the business is being driven by debt issuance and refinancing, with a little help from companies looking to raise fresh equity.
The flow of takeovers, spinoffs and other deals has been getting better, but because activity in 2023 was so weak, the normal flow of completions – and banker paydays – just isn’t there. That’s an issue for lenders who need revenue from all areas of investment banking to bolster their numbers as the trading operations that boomed since the Covid-19 pandemic start to come off the boil and lenders move past peak earnings from traditional interest-rate income, too.
JPMorgan Chase & Co., which is due to report second-quarter results on Friday, has guided investors to expect growth of 25% to 30% year-over-year in fees for advice and underwriting on deals, debt sales and equity raises. Citigroup Inc., reporting the same day, has indicated a 50% rise in these fees. Analysts forecast an average increase for the five largest US investment banks of 24%, according to data compiled by Bloomberg.
Among European banks, which report later this month or early August, Deutsche Bank AG and UBS Group AG are both forecast to see investment-banking revenue up more than 50% year-over-year in dollar terms, while Barclays Plc is expected to be up about 20%.
Right now, bankers ought to be raking it in. Conditions for M&A and initial public offerings are about as good as they could be at first glance: Economic growth is fine in many countries, major stock markets are at or near record highs and interest rates are set to ease. Fears of hard landings from the rampant inflation of the past couple of years are more or less forgotten.
The volume of deals announced in the first half is more than $1.4 trillion globally, up about 14% versus the first half last year, according to Bloomberg data. The first quarter saw blockbusters like Capital One Financial Corp.’s $35 billion deal for Discover Financial Services, while the second quarter has included Banco Bilbao Vizcaya Argentaria SA’s hostile $11 billion bid for Banco Sabadell SA in Spain and Darktrace Plc’s $5.3 billion sale to private equity firm Thoma Bravo.
Still, that first-half total is about $300 billion less than the 10-year average, according to Bloomberg News. There are fewer deals happening than bankers would hope and the rest of the year looks like being just as tricky – if not more so. The two major obstacles blocking activity are elections and the uncertainty they create, plus the ongoing struggles of private equity funds to turn over their portfolios.
M&A volume appears even weaker when viewed as a multiple of stock-market capitalization, both globally and for the US alone. Total takeovers, mergers and spinoffs announced each quarter since the second half of 2022 have amounted to barely half the average rate over the past two decades, according to Bloomberg Intelligence. On the one hand, deals being at such a cyclical low should offer hope of a rebound, which is exactly what the smaller investment banks like Evercore Inc. or Jefferies Financial Group Inc. will be hoping for after going on hiring sprees last year.
But there’s no guarantee. Private equity firms, which typically provide between one-fifth and one-third of investment-banking work, are still sitting on lots of companies bought at valuations much higher than stock markets or other buyers would apply today. At the same time in the US, the presidential election coming in November will very likely create a dead zone for markets where few people risk pushing the button on a deal, or certainly on an IPO, to avoid the potential for market volatility or surprise outcomes.
Investment banking is looking healthier than it was this time last year, but it still seems likely to be well into 2025 before dealmakers and their bosses can find sure footing again.
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