INVESTMENT BANK PROFITS BOUNCE BACK
THE WORLD’S best investment banks have clocked up bumper second quarter profits, reaping the benefits of a renewed focus on trading and capital markets underwriting, as well as the implosion of many rivals.
While many institutions – such as RBS and Citigroup – are still finding conditions tough, a group of six is emerging as the great winners from the credit crunch. This new top tier includes Goldman Sachs, Morgan Stanley, JP Morgan, Barclays, Deutsche Bank and Credit Suisse.
The collapse of established players is leading to a dramatic shift in market share in other areas of finance, including prime brokerage services for hedge funds, trade credit and mortgages, boosting firms such as HSBC, Santander and BNP Paribas.
Ahead of the reporting season on Wall Street, Thomson Reuters data collated for City A.M shows that global equity issuance in the second quarter hit $288bn (£175bn). This was up on the first quarter and the highest total since the fourth quarter of 2007, before the credit crisis.
The boom was driven by companies seeking to raise additional capital, in particular banks, which have been keen to repay state funding. Other firms have been issuing equity instead of borrowing from commercial lenders, which often remain reluctant to extend credit.
Debt issuance reached $1.39 trillion in the period, down slightly on previous measures. But the overall figures hide a sharp increase in high-yield issuance, as the thaw in the credit markets allowed weaker firms to begin raising money again.
The large fees charged by the banks – around 3.5 per cent commission to underwrite an equity issuance – will also boost earnings. And financial institutions have been cashing in on a wide gap between bid and offer prices in the debt capital markets, delivering windfalls to market-makers. They have also been making a killing on the forex and commodity markets.
Bonuses are back for many bankers, while Barclays has recruited 450 new staff in its equities operations this year, and Deutsche and JP Morgan have also been hiring. The sector has also been the subject of a raft of positive analyst notes.
US banks start reporting towards the end of the month, with UK and Europe following. Some US banks will take one-off charges to reflect Tarp repayments, which may depress some earnings announcements.