Just as the end of the Covid-19 pandemic has not repeatedly come as predicted, neither has the end of the investment banking boom. Almost every quarter in the past two years, banking leaders have said it can't last. But it has.
After the record earnings and one-off bonuses expected in 2021, it seems certain that things will slow down in 2022. However, to most observers, the outlook continues to look promising compared to most of the period since The financial crisis.
Analysts at Keefe, Bruyette & Woods estimate that the business income of large European banks will fall 7% in 2022, while the cooling of the M&A boom will reduce investment banking income by 18%. For Wall Street banks, KBW forecasts that business income will decline a bit more, while investment banking will be a bit more resilient.
However, despite the declines, European business revenues are still forecast to be 14% above 2019 levels and investment banking 27% higher.
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One of the big surprises in recent years has been the strength of fixed income operations, which recovered before the pandemic, after years of contraction after the financial crisis, and has been boosted by the avalanche of liquidity during the Covid .
It is expected to remain fairly strong in 2022 and should be helped by rising interest rates in the UK, if not the eurozone. Pessimists think that it is still artificially high. But the bulls believe it is close to a sustainable level and estimate that while it will remain cyclical, the swings will be less marked than in the past. Is this the new normal? Nobody really knows.
What is undoubtedly the new normal is the continued loss of market share by European banks to the Wall Street giants.
In investment banking, this was highlighted by the fate of BNP Paribas, which in 2020 worked its way to third place in the revenue rankings in Europe, ahead of Morgan Stanley, Citi and Bank of America. But last year, the Americans reasserted their dominance, taking the top five spots ahead of BNP and Barclays, which climbed one spot to seventh, according to Dealogic.
This is a disappointing result for BNP, which has been investing heavily on both the investment banking and trading side, where it absorbed Deutsche Bank's main brokerage business and more recently agreed to take over hedge fund clients. Credit Suisse.
Some experts are hoping for more appeals after BNP's long-awaited sale of its Bank of the West US retail business for $ 16 billion. But KBW analysts say investors would not welcome any further rebalancing from the group towards corporate and investment banking.
As revenues fall this year, a big focus for all investment banks, especially the less profitable Europeans, will be costs. There is enormous pressure on technology spending as banks grapple with their legacy systems, trying to avoid the threat of nimble fintech rivals.
Meanwhile, salary bills skyrocketed in 2021, not only from bonuses, but also from increased hiring and increased salaries in a bid to stem the exodus of junior staff.
Although many staff members have complained of intolerable workloads during the deal frenzy, some experts say that enough fat has accumulated during the boom that they expect to see cut back when activity slows down.
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In particular, they say that at some banks, the response to Brexit has led to duplication of roles in the UK and the EU. โThis was tolerated when everyone was so busy and it was difficult to move people. But once things get back to normal, there will be a jolt, โsays a bank adviser.
London-based banks also expect increased pressure from EU regulators to locate more staff and capital in the EU. Further moves are expected to be called for following a review by the European Central Bank, to be completed in the coming weeks.
While this will be a big deal for the people involved and is likely to continue to attract media attention, Brexit and its associated costs are now less of a problem for major banks.
Much more important are the outlook for inflation (including pressure on their own wages), central bank policy, and general market conditions. Although most banking strategists (with the exception of Bank of America) are quite optimistic about the stock markets, some prominent figures in the City are much more cautious. They find recent declines in many of the hottest US tech stocks disconcerting.
Says the director of a company in the city: โIf the markets hold up, then we should be facing another good year. If they don't, and there is a real chance that they won't, then all bets are off. "
To contact the author of this story with comments or news, please email david wighton
