The positive news continued for the investment banking industry this week as Barclays followed a long line of banks posting strong investment banking results. In fact, of the British bank’s $1.8 billion pound pre-tax profit for the first quarter, $1.3 billion came from investment banking division. Most impressively, divisional revenues increased by one percent to $3.5 billion, which exceeded analyst estimates, many of whom were expecting a decline in investment banking revenues. The 1 percent growth in revenues was minor compared to the dramatic cost cutting actions within the division, however, which results in an overall increase in investment banking profits of 11 percent.
Other investment banks that have produced strong first quarter investment banking revenues include Credit Suisse and Morgan Stanley. This has raised expectations for other banks due to report results in the coming weeks.
Despite Results, Investment Banking Compensation Expected to Decrease
The positive results from Barclays will put pressure on senior bank executives who have taken an aggressive stance towards limiting the institution’s exposure to risky investment banking activities. In fact, the firm’s CEO, Antony Jenkins, has suggested that restructurings and cutbacks will result in investment banking compensation declining to just 35 percent of revenues from the 41 percent level today. While these cutbacks do appear bleak, all financial institutions will need to reconsider downsizing their investment banking divisions in light of strong revenue across the industry. Investment banking is becoming even more important to the bottom line of these banks as revenue from lending and other core activities has been on a steady decline for several months.
Equity and Advisory Activities Led Revenue Growth
Interestingly, the revenue growth at Barclays came from the equity and advisory segments of the investment banking group. This is a considerable change in trend from the past several years where corporate fixed income issuance and commodities have been the stronger niches. This may be indicative of an economy returning to strength, with corporations requiring the services of equity advisors in launching IPOs or other equity based corporate finance offerings.
In addition, equity and advisory activities generally carry larger margins for investment banks in comparison to the relatively low margins found in fixed income, currencies and commodities. Improvements in these high margin activities will be difficult for banks to ignore.
What Does this Mean for Investment Banking Job Seekers?
The latest stream of results from investment banks will be encouraging news to those seeking new opportunities within the investment banking industry, but concerns still linger. While Barclays is posting promising gains in revenues, the firm is also committed to reducing its dependence on investment banking going forward. There is little doubt that further cuts may occur at Barclays in coming months in order to achieve this objective.
Fortunately, if Barclays chooses to reduce its investment banking business, the revenue will be picked up by someone else. Growing industry revenues is what is really important to investment banking job seekers going forward, as it indicates there will be more deals to work on, although which institutions will be hiring to fill this demand remains to be seen.