Ahead of the second quarter reporting season that kicks off this Friday with JP Morgan, here is the second in a series of articles looking at the challenges facing investment banks.
Investment banks have lots of problems right now, but it doesn’t help when their top line isn’t working.
After two catastrophic quarters at the back end of last year, investment banks could at least point to a recovery of sorts in the first quarter of 2012.
But before they get too carried away, capital markets revenues (from FICC, equities and investment banking) at a sample of 16 large investment banks are still falling fast when you look at them over a longer timeframe.
On a trailing 12 month view, capital markets revenues of $186bn in the year to March dropped by 16% over the past year and by nearly a third on two years ago. They have also dropped slightly on calendar 2011.
Perhaps not surprisingly, the biggest hole in the banks’ revenue numbers was blown by a 16% fall in FICC revenues, which translated into a $20bn drop in revenues in the past year. This accounted for more than half of the industry’s $36bn hit to the top line.
A 15% fall in investment banking revenues knocked nearly $7bn off the banks’ revenues, while a more resilient performance in equities, which are down just 10% on the year, hit their numbers by more than $5bn.
This decline in revenues is not the result of a handful of underperforming banks. It is almost uniform and Morgan Stanley was the only bank in the sample to post an increase in its capital markets revenues over the 12 months to March:
Of course, falling revenues across the industry are not a surprise, and shouldn’t be a problem for investment banks to take in their stride as they adapt their famously flexible cost base. Sadly, these costs have proved less flexible than the banks might have believed.
While total revenues at investment banks have fallen by 30% over the past two years, expenses have actually risen by 10%. Over the past year, costs have fallen by just 4% compared with the decline in revenues of 16%. Oops.
These negative jaws – of revenues falling faster than banks are able to cut their costs – seems to be endemic across the industry. Over the past four quarters just one investment bank – JP Morgan – has managed to bring its costs down faster than the fall in its revenues.
With the second quarter results expected to show steep declines in FICC, equities, and investment banking, and the second half of the year showing now signs of recovery, it looks like the knives will be coming out again soon.
Note: all of the above numbers exclude own credit / DVA, and have been converted into US dollars at prevailing quarterly exchange rates. The source is my analysis of banks’ reported results.