Investment banks: Investment banks stumbled from one crisis to crisis in the second quarter: fraud charges against Goldman Sachs, the euro zone debt mess and the US “flash crash” of May 6 all added to the turmoil. So it's no surprise that earnings for the past three months are likely to have been weak. Analysts are pencilling in a 30-40 per cent quarter-on-quarter decline in investment banks’ profit after tax.
There were some bright spots. The biggest insurers in Korea and Poland completed IPOs worth a combined $7 billion. Bankers also had a few big takeovers to work on, including $10 billion-plus bids for Qwest Communications, the US telecom group, and UK satellite broadcaster BSkyB.
But there were many disappointments. When shareholders forced UK insurer Prudential to abandon its $36 billion bid for AIA, bankers missed out on about half a billion pounds in fees. While mergers and acquisition volumes kept pace with the lacklustre first quarter, global share and bond issuance fell 20 and 40 per cent, respectively. Corporate finance revenues are estimated to have fallen almost 20 per cent in the quarter, according to Thomson Reuters.
As ever, sales and trading divisions will provide the real measure of how investment banks have fared. These business generated three quarters of Goldman Sachs’s revenue in the first quarter, and around half at Morgan Stanley, Deutsche Bank and Credit Suisse. The omens are not encouraging. While a little market volatility can add spice to trading performance, too much scares customers away. May was the worst month for hedge funds since November 2008, according to Hedge Fund Research, with the average manager losing 2.3 per cent. Meanwhile, reduced levels of corporate activity also dampened deal-related trading.
Banks may also have been wrong-footed by the market's sudden lurch lower in May. Many will have built up significant trading inventory during the good times earlier in the year, creating the potential for significant losses.
Banks claim to have scaled back their risk taking in order to concentrate on executing client business. When markets are benign it can be hard to tell: Wall Street's largest banks did not record a single day of trading losses in the first quarter. The tougher climate in the past three months is more likely to have exposed mistakes.