2017- Terrible Start for Investment Banks

It has indeed been a miserable start to 2017 for Investment Banking. So much so UBS has put salary increases on its bankers on hold. When the words ‘mildly optimistic’ and ‘not bad’ get thrown around, you know you have a problem. Then Barclays cut its bonus pool third year running citing potential fall in future revenues. Morgan Stanley cut Investment Banking bonuses by 15% and pruned their Managing Directors by 5%. And then finally New York based Moelis bagged the biggest IPO of the century – the 2 trillion Saudi Aramco IPO, telling the bulge brackets it was time they rethink their entire business model which is riddled with conflicts. And then over a 100 Goldman Sachs bankers received a goose egg in lieu of their 2016 bonuses, a sure sign they need to look for employment elsewhere and that all banks are rethinking their banking.

The dismal bonus payouts don’t come as a surprise because 2016 was not a good year for Investment Banking whichever way you cut it. Deal logic reports Global ECM volume of $724.2bn in 2016 marked the lowest annual total since 2012, with volume dropping 21% from 2015 ($913.1bn). In fact IPOs ($135.6bn) were at the lowest level since 2012 ($124.3bn) and down 30% year-on-year. Deal logic also reported that global syndicated loan volume totaled $4.29tr in 2016, the lowest level since 2012 ($3.48tr) and down 5% on $4.51tr borrowed in 2015. M&A didn't fare any better. After three consecutive year-on-year increases, global M&A in 2016 dropped $3.84tr from the 2015 annual record high of $4.66tr with volume falling 18% year-on-year.

Consequently IB fee revenues declined for the second consecutive year to $73.6bn, dropping 5% year-on-year to the lowest level since 2012 ($69.0bn). Despite Indian M&A enjoying a record year in 2016, fees dropped 11 percent and banks earned a measly $440 million in revenue with most of that going to foreign banks. Indian Private Equity didn’t fare any better. PE deal volume fell by almost 25 percent to 1309 deals, with deal value crashing 44 percent to $12.38 billion. Early stage investments showed a significant decline of 39 percent to 1.59 billion, which shows that most reports were more hype than real action. It looks like the good days of 2006 might never return for bankers even as M&A deal volumes and values seem to be making a comeback. This brings us back to the outlook for 2017, which doesn’t look all that rosy.

While capital is available and cheap, bankers fear the consequences of geopolitical events and lackluster growth in emerging markets but state that CEO confidence is at a high. A managing director at a global investment bank said, “Businesses are receiving increasing pressures from shareholders and peers to remain relevant in the changing digital landscape. As such, large technological advancements will be the main driver that will increase deal making next year.”