Investment banking leaders started this year confident that the records their dealmakers notched in 2021 would be swiftly broken. Things changed quickly.
The pace of initial public offerings and large-scale mergers slammed to a halt in recent weeks as Russia’s invasion of Ukraine threw markets and broader economies into chaos. It’s particularly stark in Europe, where one senior dealmaker expects M&A fees to drop by a third and equity underwriting revenue to fall even more steeply.
Of course, the conflict has disrupted things far more consequential than Wall Street’s fee stream, but the ripple effects of the war are far-reaching. As companies globally stall public offerings, fundraisings or strategic mergers, banks are losing the business they hoped would provide a soft landing at the end of a two-year boom in trading.
Wall Street’s five largest lenders generated a record $55 billion in revenue in 2021 from putting together stock and bond offerings, as well as advising on mergers and acquisitions. That was up 40 percent on the previous year. European lenders benefited too: Barclays Plc posted its highest banking fees in at least seven years, helping the lender hit record annual profit.
Russia’s attack, though, has snapped shut the market in many areas. Since the invasion began on Feb. 24, just $110 million of initial public offerings have been priced on European exchanges, compared to some $2.8 billion during this period last year, according to data compiled by Bloomberg. In the same weeks in North America, IPOs have dwindled from $24 billion a year ago to $1.7 billion.
The uncertainties created by Russia’s invasion of Ukraine is encouraging companies “to be financially conservative and hoard cash rather than do deals,” said Ismail Erturk, senior lecturer in banking at the University of Manchester. “There is demand for hedging and managing risks at corporate level and such products can be sold at a premium. But I doubt such risk management products can replace revenue losses from deal making.”
Even before the invasion, the deals boom had started to show signs of fatigue, particularly in Europe, as economies slowly pulled through the pandemic. Now, higher commodity prices and volatile markets are creating more issues for clients, who are trying to weigh up the effects of a prolonged conflict.
Traders are also contending with these huge price swings as they try to live up to their stellar pandemic-era performances that buoyed bank earnings for the past couple of years. While banks are yet to report results for recent months, a spate of hedge funds focused on macro and commodity bets have won big — and lost big — in the recent moves.
JPMorgan Chase & Co.’s trading head said Tuesday that a lot of clients are under “extreme stress” tied to the impact of Russia’s invasion of Ukraine and resulting sanctions from the U.S. and European Union. At JPMorgan, markets revenue was down 10 percent this quarter as of Friday but “things have changed a lot since then,” Troy Rohrbaugh said.
A senior executive who works for a U.S. bank, who asked not to be named discussing private information, said that volumes in fixed income, currency and commodities trading were holding up while credit markets were under severe stress. Traders are dealing with a crisis scenario similar to 2020 where there is little liquidity, while some clients are facing margin calls, the person said.