From Goldman to JPMorgan, deals have dried up

Goldman Sachs Group Inc is about to cut more bankers after sacking thousands in January. Morgan Stanley and others have also ditched thousands, while hundreds of Credit Suisse Group AG’s people are just leaving of their own accord, expecting the worst from its rescue takeover by UBS AG. The two Swiss groups are even offering $30,000 cash to new junior bankers who agree to delay their start dates until next year, according to reports.

Deutsche Bank AG is hiring, but only expanding its mergers and acquisitions teams by about 50 bankers and that’s because it didn’t grow its ranks significantly during the dealmaking boom of late 2020 and 2021.

In short, it’s been a miserable spell in investment banking and if anything, it might only get more grim. Yes, the debt ceiling standoff is over, the US banking crisis has been calmed and interest rates in western countries are nearing their peaks, but bankers from New York to Paris are struggling to get clients to do anything interesting at all.

Top executives are talking about tougher times to come and that’s why more jobs are set to go. “Feels like we are going to have a contractionary environment for a period of time,” said Goldman Sachs’s President, John Waldron on Thursday, when outlining the bank’s next round of cuts at a conference organised by Alliance Bernstein.

Deal volumes have slumped across their most lucrative businesses as corporate executives have sat tight since early last year, awaiting the bad news on war, inflation and volatile markets to end. Global investment banking fees in April were the lowest monthly amount seen in the past decade, Viswas Raghavan, co-head of JPMorgan Chase & Co’s global investment and corporate bank, told shareholders at the US bank’s investor day in May.

There is still a month left in the second quarter, so activity could improve. But for now global M&A volumes are on course for the weakest rolling four-quarter total since 2013. Relatedly, leveraged lending, the business that funds junk-rated private-equity deals, has been crushed. US leveraged loan sales are running at their worst four-quarter total since 2016, while in Europe they’re at the lowest levels in a decade.

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The story in stock markets isn’t much better in spite of some slim signs of potential recovery, such as the plans by a $7.5 billion Turkish soda ash producer, WE Soda, to list in London. The volume of initial public offerings in Europe, the Middle East and Africa on a rolling four-quarter basis is also at its lowest in more than a decade. Still, IPOs in the region are running at more than double the volumes of those in the US, helped by a relative boom in markets like the United Arab Emirates, where shares in a logistics company, Adnoc Logistics & Services, jumped more than 50 percent on their Abu Dhabi debut Thursday.

Across all forms of equity deals, including convertible bonds, rights issues and secondary offerings, volumes are also at decade lows for both regions.

So what are the chances of things getting better in the rest of the year? Not good, for two main reasons. First, banks themselves are still wary of taking on much risk because the economic outlook remains deeply uncertain to downright troubling and they’re still working to shed exposures from before last year’s slowdown. For example, the debt backing Elon Musk’s $44 billion takeover of Twitter still hasn’t been sold, while other financing from earlier in 2022 is being sold only at heavy discounts. Debt backing the takeover of MoneyGram by private equity firm Madison Dearborn Partners has been offered to investors this week at 83 cents on the dollar – a huge discount.

The second reason: More competition from outside the mainstream. The global investment banks collectively lost market share last year to Chinese banks capturing most local stock market listings — one of the few businesses that has been booming anywhere in the world — and to smaller firms, known as boutiques, that won a growing share of M&A fees.

And there’s more bad news for bankers in that the trading bonanza of last year is deflating, too. Daniel Pinto, JPMorgan’s chief operating officer and de facto number-two to Chief Executive Officer Jamie Dimon told the bank’s investor day that second-quarter revenue from stock and bond trading was likely to be down 15 percent versus the same period last year. On Thursday, Goldman’s Waldron estimated its trading revenue would be more than 25% lower this quarter versus last year.

With many US and European companies still sitting on comforting piles of spare cash, improved profit margins or both, the chances of a deep recession and sharp rise in unemployment still seem relatively low. For once, it is the bankers who look like they’re having a worse time. Those juniors being offered $30k to stay at home might want to just enjoy an extended summer break – and then go looking for a different industry to join.

Paul J Davies is a Bloomberg Opinion columnist covering banking and finance. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg