Gloomy end to Q3 as markets fall and i-bank fees dwindle

The third quarter of 2011 has ended on a suitably bleak note, with markets down and investment banking fees at a three-year low.

by Andrew Saunders
Last Updated: 06 Nov 2012
Despite yesterday’s smattering of relatively good news from the EFSF, and the better-than-expected US growth figures, the FTSE all-world stock market index is down a hefty 17% for the period, while the Reuters-Jefferies CRB index, a basket of commodities, is down 9% across the board. Copper – a key global economic barometer – has been hit particularly hard, with prices down 22%. And as riskier assets have become less attractive, so ‘safe havens’ have become more popular and less rewarding –  yields on German and US Treasury bonds are at record or near-record lows.

Meanwhile, those poor benighted investment bankers have experienced their worst period as far as fees are concerned since the dark days of Q4 2008. The uncertainty surrounding the Euro and the US economies in particular have put the mockers on the two main sources of fee income for banks – advising clients on M&A and capital raising activities. Fees were down 43% from Q2, according to data from Thomson Reuters and Freeman Consulting, a trend which could see overall fee income drop below last year’s level, despite being currently up 5% year to date at $57.6bn.

Global M&A’s are down 14.3% from Q2, at $481.2bn, with Europe suffering most. M&A in the Asia-Pacific region saw a slight recovery. Similarly the capital markets are quiet – not, say many observers, because of a lack of interest, but simply because firms are delaying investments or acquisitions, employing ‘a wait and see’ strategy due to concerns over potential European sovereign defaults and the US debt ceiling.

Just as well then that fees only account for around 15% of a typical i-bank’s income. Top of the fee earners ranking so far this year remains JPMorgan at $.1bn, with BankofAmerica Merrill Lynch second at $3.6bn. Flying the flag as the only ‘British’ name in the top 10 is Barclays Capital, with fees of $2.1bn in the first nine months of 2011.

Of course it’s hard to find much sympathy for i-bankers, many of whom have continued to make out pretty well for themselves despite the global downturn. If their bonuses are off by the end of the year, they should still manage to get by. But the risk-aversion that this lack of activity suggests is not good news – we are all dependent on the financial markets to keep the machinery of commerce running smoothly, should it slow down too much then we will all feel the consequences.

The solution? Time for some decisive political leadership, especially in Europe. The cost of the uncertainty generated by the current glacially slow pace of progress there could end up being greater than the cost of the crises they are attempting to forestall…

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