The Big Unwind Hits Investment Banking

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:

  1. JP Morgan with 8.1% of the wallet
  2. Goldman Sachs with 7.0%
  3. Bank of America Merrill Lynch with 6.7%
  4. Morgan Stanley with 6.6%
  5. 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

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  15 comments for “The Big Unwind Hits Investment Banking

  1. Sgt Milstar says:

    So, will banker bonuses still be one percent of the GDP this year? If so, time to prepare for the depression.

  2. nick kelly says:

    The one thing that sticks out to me is Deutsche Bank- I kind of thought they were above all these shenanigans. In Micheal Lewis book ‘Boomerang’ he says the Germans were the only euro guys who didn’t go on a spending spree- which is ironic since it was their credit card. But I guess Deutsche is not the average German.
    To hear D has risky exposure- jees!

    I put some money in Banco Espirito Santo and it was spirited away.

    • MC says:

      The German banking world is mostly a complete mess.
      Since 2010 or so the banks that have been at the receiving end of taxpayers’ (unwilling) largess have been legion.

      Now, most of these are small or medium banks mostly active in a certain geographical area, so you rarely hear of them outside of Germany or, more often, the area they operate in, but it has been a bloodbath.
      The most notorious case was that of HSH Nordbank, which last October reached a restructuring deal with the EU which is typical of the modus operandi: given the two largest shareholders are the Lander of Schleswig-Holstein and the City of Hamburg, these two entities agreed to take on their books billions worth of troubled assets.
      Technically speaking it was a sort of bail-in, as the banks’ main shareholders ate the losses, but practically speaking it was a bailout paid for by the citizens of Hamburg and Schleswig-Holstein.
      HSH Nordbank made international news because it was caught between the double pincer of the Hypo-Alpe-Adria fiasco and being extremely active in providing credit to small shipping and freight-forwarding companies, which last year started to default on their loans.

      German economic growth post 2009 has raised a lot of questions, which mostly remain unanswered. Among these is the quality of loans which their banks extended with abandon to domestic export-oriented companies. Now: even in a roaring economy there are always bankruptcies, even high profile ones. For example in 70’s Japan, a “can do no wrong” economy, the largest independent (read: not part of a major keiretsu) trading house, Ataka & Co, went bust forcing Sumitomo, the main bank, to eat a lot of losses.
      You don’t hear about bankruptcies in post-2009 Germany and you never hear about NPL’s… very very curious considering even China has the odd high profile bankruptcy once in a while and that Chinese NPL’s are the subject of endless analysis.
      I am sure the German economy has been doing very well, but too often it’s presented as a fairy tale economy, where nothing ever goes wrong.

      I strongly suspect the intricate patterns of ownership in many German companies, which often extend to local governments, which in turn are often the owners/main shareholders of local banks providing credit, may have something to do with this.

      Also allow me to mention to the 300lbs Silverback gorilla in the room: Volkswagen AG (or VAG, as we old hands refer to it). Complete silence has descended on the emission scandal, with the only recent insight on the case being offered by a hacker consortium which built a “virtual ECU” to better understand what VAG had done. Very very clever stuff from both VAG and the hackers.
      Since has also descended on another European carmaker caught in a similar, albeit smaller in scope, scandal: Renault.
      What do these two firms have in common? They are both major automaker in which governments have large stakes: 15% of Renault is still owned by the French government, while VAG is “owned” (this is based on voting rights, not actual subscribed capital) 20% by the Lander of Lower Saxony and 17% by the government of Qatar.

      • Sgt Milstar says:

        Kinda like in America. A guy named Walter Burien exposed the Comprehensive Annual Financial Report (CAFR) and the hidden slush funds hidden in the reports. Since most governmental retirement programs also known as pension plans are nothing but a Social Security avoidance tactic, that allows its plans to buy stocks, real estate, bonds and other financial instruments for the benefit of its employees. Walter made a video years back that showed that the governmental plans owned more than 50 % of Apple, IBM and Microsoft stocks. CalPers comes to mind as issuing directive instructions to the board of directors of companies it had a financial interest in.

      • nick kelly says:


    • walter map says:

      “I put some money in Banco Espirito Santo and it was spirited away.”

      You could say they Madoff with it.

      Your donation is appreciated. Every little bit helps.

  3. Agnes says:

    Late reports from China said that Liu Qibing was sent to jail for 7 years(the Copper futures settlement ‘failure’ on the LME in 2004/2005). No doubt the Chinese futures traders in financial areas keep him before their minds and are a bit more cautious than their Western brethren…but how can there be a ftd on paper promises made in one’s own country in one’s own currency(a situation that has not existed in America since the very early 1980’s)?

  4. Petunia says:

    Can anybody think of a merger that turned out to be a good idea? I can’t. The only merger that made sense never happened, Microsoft and Yahoo. Now Yahoo is selling itself again, except now there are better partners to be had, but I’m sure they will pick the wrong one. Yahoo would make a good portal for a telecom company like Verizon, Comcast, or ATT. Let’s see where they are steered for the fees.

  5. Chris says:

    The Chinese are very concerned, and justifiably so, that should their credit bubble pop so too will the economy. The leadership is seeing images of Tienanmen Square all over again, except it will happen in cities across the country. The Chinese leadership knows full well that they are up against the wall and should the economy collapse, as seems more and more likely as time goes by, that a firing squad will appear before them. 7% annual growth my ass.

  6. unit472 says:

    Before I weep too much for the big investment banks I would point out that Yellen’s 0.25% increase will, by my math, allow the $2.5 trillion in QE held by the TBTF crowd to earn $12.5 billion this year as interest on excess reserves. One reason perhaps Yellen got cold feet in March over raising the rate again.

    The American people might get a little irritated at Yellen doling out billions in free money to the banks while deposit rates stay flat.

    • professor plumb says:

      Excellent point. This implicit subsidy has provided a huge cumulative boost to TBTF institutions since 2009. How much of their battered mortgage backed debt has been transferred to the Fed’s balance sheet since 2009? Smaller banks must be livid at the “socialization of risk” combined with the financial repression that redistributes the” largesse” of the Fed.

  7. TheDona says:

    Thanks Wolf! This is the clearest picture yet of the global economic malaise. They can’t hide the fees like they do with the rest of the accounting data.

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