Last week, we discussed the strong results of investment banks in the first quarter, with many institutions posting substantial gains in revenue. However, as results continued through last week, it became evident that the gains of some were in fact the losses of others. This confirms the long discussed idea that investment banking is becoming increasingly concentrated within a few key large players. Firms with smaller investment banking groups are finding it increasingly difficult to post sufficient returns to justify further investment from their broader institutions, and as they are starved of investment, they enter a vicious cycle of further declines in revenue and margins.
Royal Bank of Scotland Sees a Sharp Decline in Performance
Barclays the led the way last week with a considerable 11 percent jump in investment banking profits for the first quarter. Unfortunately for its European peers, this trend was not to continue in their favor. The Royal Bank of Scotland (RBS) posted its results last week, indicating very poor performance within its investment banking group. While it did post a profit over the first three months of 2013, revenues fell a whopping 40 percent, sliding to a meager 1 billion pounds. Overall, this resulted in RBS missing analyst expectations by 400 million pounds.
BNP Paribas Also Joins the Malaise
Following the lead of its British peer, BNP also experienced a substantial drop in investment banking revenues in the first quarter of the year. The decline in revenue of 45 percent dramatically overshadowed the rest of the large French institution’s earnings report, which included major improvements in other divisions. Fixed income trading led the way down for BNP Paribas, which was somewhat surprising after seeing bond desks around the world grabbing more attention in a tough investment climate. These latest results seem to indicate that the enthusiasm placed with one of the more pedestrian investment banking activities may have be premature, and a blip in the market through 2012 may not be evident of a long term trend.
What are the Implications for Investment Banking Job Seekers?
Keep in mind that investment banking is tied closely to the overall economy. When there is robust economic growth, there are plenty of deals to be made, from new debt financing to initial public offerings. However, the ongoing concerns in the United States, Europe, and even Asia, are weighing on corporate desires to undertake large scale transactions. In any environment, though, there are opportunistic investors and companies that are looking to seize on uncertainty to develop value, and these clients provide deal flow even in tough economic times.
Accordingly, the ongoing economic situation doesn’t mean it is all doom and gloom for investment banks. While both RBS and BNP struggled in the first quarter, along with American Morgan Stanley, it’s important to remember that different institutions have different focuses. It may become harder to find a job as a bond trader in the coming months due to the under-performance of this segment, but firms focused on equity underwriting have done quite well, opening up potential opportunities there. Goldman Sachs was one such firm with strong performance results on its equity desk.
At the end of the day, it’s important for those seeking jobs in investment banking to remain opportunistic and to be willing to work in positions that may be slightly outside their comfort zone, especially in rapidly shifting economic times.