Investment Banking Fee Woe Continues - Analyst Blog

By Zacks | October 01, 2012 AAA

According to Reuters, global investment banks are facing declining investment banking fee income, bearing the brunt of the amplifying Eurozone crisis. Thus, concerns have crept up in the slothful stock market momentum.

According to the source, global investment banking fee income fell 3.8% in the third quarter of 2012 to $15.5 billion from $16.1 billion in the year-ago period. Plummeting fees resulted from a decline in share sale activities. Additionally, income from equity capital markets deals dropped 31% to $9.6 billion for the nine months ended 2012, representing the slowest period since 2003.

Major investment banks - including Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), The Goldman Sachs Group Inc. (GS), Credit Suisse Group (CS), Barclays PLC (BCS), Deutsche Bank AG (DB) - are expected to feel the pressure of the dipping fee income in their upcoming quarterly earnings results.

Coupled with the falling fee income, the crisis has severely hit securities underwriting and merger activities of the financial institutions. However, we can expect the income from retail divisions and wealth management wings to support earnings to some extent, but the downfall of investment banking division would be a deterrent.

On the other hand, attempts to boost revenues through non-interest sources -- introducing prepaid cards, imposing new fees, increasing minimum balance requirements on deposit accounts and encouraging customers to use credit cards -- could be hampered by ongoing regulatory actions, a volatile global economy and soaring overhead. So, non-interest income will be able to marginally contribute to the total revenue.

Lower industry revenue has been forcing these banks to cut costs in order to stay afloat. As a result, banks will continue cutting jobs and reducing the size of operations by selling their non-core assets. So, any cost-cutting measure will act as a defense mechanism.

Owing to the effect triggered by the Eurozone crisis, banks are conducting layoffs in various divisions to curtail costs. Moreover, new regulations and market volatility has added to the woes.

If the crisis continues further, there will be significant impact on worldwide capital markets. On the other hand, the extremely low interest-rate environment is another manifestation of this uncertain macro backdrop. Concerns about the European finances and soft U.S. growth prospects have made treasury instruments the choice of safe asset class. As a result, the yields on benchmark treasury bonds are hovering at all-time low levels.

Clearly, the banking system is still not out of the woods, as there are several nagging issues that need to be addressed.

Given the progress in the industry so far, it seems that banks may encounter several disappointments ahead before gaining investors' confidence. In fact, the negatives could offset the positive developments to a great extent. We don't expect the potency of the sector to return to its pre-recession peak anytime soon.

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