From the monthly archives:

April 2013

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.

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After several quarters of considerable under performance, investment banking is beginning to exhibit signs of renewed strength in the United States. Across the industry, firms are reporting improved profitability, albeit more based on declining expenses than growing top line revenues. That being said, investment banking is leading some of the limited revenue expansion seen at top financial institutions as the cyclical nature of the industry seems to be poised for a potential upturn.

According to a Brad Hintz, banking analyst at Sanford C. Bernstein, who was cited in a Yahoo Finance article, equity underwriting volumes “are up by 30 percent,” while mergers and acquisitions are “are up over 20 percent.” These are significant gains in an industry that has been plagued by declining equity underwriting and merger activity for several years since the financial crisis.

Firms that Shifted Focus to Other Activities Begin to Underperform

Morgan Stanley was one such firm that began the year on a positive note, posting a healthy first quarter profit of $1.2 billion that exceeded analyst expectations. However, the outlook for Morgan Stanley may not be as optimistic as the first quarter may indicate. Over the past few years, the Wall Street giant began to shift away from its traditions in investment banking and trading while shifting its focus to wealth management. Unfortunately for the firm, this segment is beginning to look as though it may lag investment banking in terms of growth in the coming years. The wealth management business is “probably isn’t going to pick up until 2014,” according to Hintz.

This outlook contrasts with the major Wall Street players that chose to maintain their focus in investment banking rather than bail out towards the safer pastures of wealth management. Firms such as Goldman Sachs stand to benefit greatly from an uptick in investment banking, as most of their revenues are derived from these and other riskier activities. In fact, Goldman was one of the only big firms on Wall Street to report growth in top line revenues as well as growth in profits in the first quarter on the back of the improving investment banking industry.

Firms that focus on mortgage lending also underperformed the investment banking leaders as well, with lending to households and businesses continuing to struggle along with a lackluster economy. Revenues at firms such as Wells Fargo, Bank of America and JP Morgan fell in the first quarter.

What are the Implications for Investment Banking Job Seekers?

This upturn in the outlook for investment banking will be a welcome development for those seeking opportunities within the industry. For the first time in several years, there seems to be some positive momentum developing. That said, the economic recovery at this point is still tenuous, and the long term health of the economy is fragile. However, if the current path towards recovery can be maintained, perhaps the tide will soon turn in the investment banking industry and potential job seekers may find a help wanted sign instead of the steady stream of pink slips employees have been faced with for the past several years.

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Whether in North America or Europe, mid-tier investment banks have struggled to maintain their market positions in the wake of the financial crisis. Increasingly, core investment banking activities have become concentrated amongst a few large players, as economies of scale allow only the biggest players to realize acceptable margins. Large firms such as Goldman Sachs in the United States and BNP Paribas in Europe have effectively captured most of the market share of mid-tier players. And now, according to a recent article from Reuters, these smaller institutions are now seeing increasing pressure from regulators and investors to exit other investment banking activities such as proprietary trading and M&A advisory.

Cost of Regulation Weighs on Smaller Banks

One of the elements leading to the demise of the smaller or regional investment banking players is the cost of regulation. Throughout the financial industry, compliance with a wide range of regulations is a mounting burden for all organizations. The reality is that only larger institutions are able to achieve the scale necessary to maintain a large compliance department while still earning margins sufficient to justify the risk investment banking brings to the overall bank portfolio.

Banks such as Credit Agricole and Natixis, medium-sized French institutions, are examples of this struggle within the industry to post margins that are sufficiently rich to justify further investment from their parent companies. Agricole indicated a weak 1.6 percent return on tangible equity in their most recent financials, hardly enough to justify the risk that the investment bank adds to the overall institution.

Unfortunately, banks like Agricole may find a limited market for the sale of their investment banking divisions. Larger players are seeking to conserve risk capital ahead of the Basel III implementation and smaller players certainly are not looking at expanding unsuccessful outfits. Worst of all, concerns remain regarding the legacy positions in toxic assets held on the balance sheets of many smaller investment banks. Instead of acquiring assets, many of the large firms have looked instead at poaching top talent from their struggling peers.

“Maybe there are some attractive parts, good teams, but the trouble is you would only want the people, not the legacy positions, so rather than buy the whole thing you may as well hire the people,” an unnamed London investment banker told Reuters.

Smaller Players Find Success as Regional Experts

While the situation facing Agricole and its peers looks bleak, they can look to Northern Europe for an example of smaller firms finding success. Swedish bank Nordea has found a unique niche offering regional expertise to local firms within the Nordic countries. Shifting focus to where they hold a sustainable competitive advantage while maintaining acceptable margins has been key for Nordea in keeping competitors at bay. CEO Christian Clausen told Reuters, “We are not a global player, but when I meet with the bulge bracket, they say we are the most difficult competitor regionally.”

Perhaps a return to their local roots where they can offer a unique understanding of the local business culture and climate is the key to the future success of mid-tier investment banking in Europe.

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Investment Banks Search for Untapped Markets

April 8, 2013

Despite an uptick in investment banking revenues in the first quarter of this year, the extended run of falling revenues over the past several years has investment banks scrambling to find new sources of income. In some cases, this has meant increasing their focus on certain service offers which have proven to be more robust, […]

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Investment Banks See Strong Start to 2013

April 1, 2013

The first quarter of 2013 certainly looks to be promising for investment banks around the world. According to a Financial News article that summarized data from Thomson Reuters, fee revenues have climbed dramatically in the first part of the year. Some institutions even saw gains north of 40 percent. This growth will be welcome news […]

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