LEX Forget what investment bankers say about profitability or shareholder returns – what they care most about is size. Managers constantly compare headcounts and obsess about “revenue gaps” to their nearest rivals. Now, after five years of gunning for growth, investment banks are going to have to get used to the idea of shrinkage. But in a deleveraged world, how much smaller do they have to get?
Even excluding writedowns, the shock to investment banking revenues has been severe. Dealogic data for the first quarter of 2008 shows global fee revenues down 45 per cent on last year. Sure, the opening few months were harsh, but that implies an annual run-rate of about $48bn – back to 2003 levels. The banks do not expect “normalised” revenues to fall by anything like that amount. For example, with additional cuts announced, UBS plans to reduce its investment banking headcount by only 18 per cent from the peak.
Part of banks’ optimism is due to their confidence in the resilience of sales and trading activities, which often contribute more to revenues than fee businesses. Volumes (and volatility, which traders love) in equities, bonds and foreign exchange, in particular, remain high. Commodities desks are benefiting from the resources boom. But there are obvious risks in these areas too. Experience in Japan shows soggy equity markets eventually hurt volumes. Tighter credit conditions will hit fixed income trading and it is hard to see how the environment for commodities can get any better.
Meanwhile, the outlook for mergers and acquisitions, which still made up 35 per cent of global fee revenues in the first quarter, is bleak. Equally worrying is the recent poor performance of some hedge funds. Credit Suisse estimates this client group is now the most important for investment banks, contributing a fifth of revenues.
Should the few remaining bright spots in investment banking also begin to darken, revenues could easily remain at half of their peak levels for some time to come.
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