Everyone but China.
The meme has been that central-bank-imposed low interest rates and negative interest rates are killing bank earnings, and that oil-and-gas loan loss reserves maul what’s left of these earnings. But it’s tough for banking all around, as the global QE bonanza is bumping into real-world limits. And the Big Unwind has started.
For investment banking revenues, a key income source for “systemically important” banks, it has been one heck of a terrible first quarter, according to Dealogic’s preliminary Global IB Strategy Review. And the damage will show up in earnings reports soon.
If, in the list of fee mayhem below, you frequently stumble across phrases like “plunged,” “plummeted,” “lowest since Q1 2009” when the bond market imploded during the Financial Crisis, or “lowest since Q1 2001” when the dotcom and IPO bubble imploded, it’s because that’s the kind of quarter it has been for investment banks and their lifeblood: extracting big-fat fees coming and going.
The fee massacre on a global scale
Global investment banking “revenues” — which sounds more peasant than “fees” — plunged 36% in the first quarter from a year ago to $12.8 billion. Fees across all products plunged, but the biggest cliff dive was reserved for fees from the Equity Capital Markets (ECM):
- Global ECM fees plunged 55% year-over-year to $2.3 billion, the lowest quarterly total since Q1 2009.
- That percentage cliff dive nearly matched the worst ever Q1 dive of 57% in 2001 when ECM fees plunged from $6.5 billion in Q1 2000 to $2.8 billion in Q1 2001, after the collapse of the dotcom bubble.
- Of those $2.3 billion in ECM fees, global IPO revenue accounted for $336 million, from 151 deals, the lowest quarterly total since Q1 2009, as IPO volume plummeted 74% to just $10.6 billion!
In the Debt Capital Markets (DCM), a similar scenario played out, but not quite as brutal. Global DCM revenues in Q1 plunged 32% year-over-year to $4.1 billion, the lowest since Q1 2009. Of that…
- Fees from junk bonds plummeted 70%! At a puny $522 million, these fees marked the worst first quarter since 2009.
- Fees from investment-grade bonds dropped 13% to $2.5 billion, propped up by the Anheuser-Busch InBev merger that generated $46 billion in bond issuance, the second largest investment-grade deal ever.
- Fees from syndicated lending — the junk-rated “leveraged loan” phenomenon that is now in a tail-spin — plunged 30% to $1.9 billion, the third year in a row of Q1 year-over-year declines.
- Investment-grade loan fees plunged 50% to just $378 million.
Fees from M&A, after rocketing higher for years, dropped 24% in Q1 to $4.4 billion. Of that…
- Fees from corporate takeovers — “Strategic M&A,” as it’s called – dropped 24% to $3.0 billion, the lowest Q1 total since 2010.
- Fees from private-equity led takeovers – “financial sponsor related M&A,” as it’s called – dropped 24% to $1.4 billion.
Fees from private equity related investment banking plunged 46% to $1.8 billion, the worst first quarter since 2009, and accounted for only 14% of global investment banking revenues, the lowest Q1 share since 2009. This is a sign that private equity firms have lost their appetite for LBOs.
The top five banks in terms of extracting investment banking fees were:
- JP Morgan with 8.1% of the wallet
- Goldman Sachs with 7.0%
- Bank of America Merrill Lynch with 6.7%
- Morgan Stanley with 6.6%
- and Citi with 4.7%.
In the US, a similar scenario played out, only worse.
US investment banking fees in the first quarter plunged 38% to $6.0 billion (about half of the global total), matching Q1 2010. All products were down. Hardest hit? You guessed it.
ECM fees plunged 64% to $848 million. Of that…
- Fees from follow-on offering plunged 58% to $714 million, the worst Q1 since 2009.
- Fees from IPOs plummeted 77% to $76 million, with only eight smallish deals, the lowest Q1 fees and number of deals since 2009.
M&A fees fell 28% year-over-year to $2.3 billion. In Q4, with M&A still grinding higher while other measures were declining, it accounted for 47% of total investment banking fees, an all-time record for any quarter. In Q1, the share of M&A fees was down to a still high 39% of total investment banking fees.
DCM fees plunged 41% year-over-year to $1.6 billion, the worst Q1 since 2009. Of that…
- Fees from junk debt plummeted 67% to $300 million, the lowest Q1 since 2009, as volume plummeted 71%.
- Fees from investment grade debt also got hammered but not quite as brutally, falling 29% to $950 million.
Bloodletting in Europe, Middle East, and Africa
Total investment banking revenues in Europe, Middle East, and Africa (EMEA) in the first quarter plunged to $3.5 billion, the lowest since 2002! (Not a typo.)
In Asia Pacific, everyone but China
In the Asia-Pacific region, investment banking fees dropped to $2.5 billion, the lowest since Q1 2009.
But in China, whose credit bubble is getting blown to stunning proportion in order to keep the collapsing credit bubble from collapsing, investment banking fees rose 5% in Q1 to $1.4 billion, the only nation of the top five globally to increase fee revenue. Of that total, DCM fees soared 79% to $615 million, the highest first quarter on record – as debt issuance is ballooning.
The top five investment banks in China were Chinese, led by CITIC Group, the state-owned financial conglomerate, and GF Securities.
Barring a financial crisis, it is hard to imagine a worse quarter for the big banks engaged in investment banking. And yet, it’s just the beginning. Banks have been at the epicenter of the great credit bubble. They’ve benefited from it. They’ve sucked it dry. They’ve become bigger and fatter and paid out record bonuses for years. But now the Great Unwind has arrived.
Due to the recent surge in oil prices, new optimism has crept into junk bonds, and the “distress ratio,” which had soared past Lehman bankruptcy levels, improved somewhat. But “leveraged loans” weren’t so lucky. Their distress ratio spiked to the highest levels since the Financial Crisis! Read… Bank Earnings Get Mauled by “Leveraged Loan” Time Bomb