Business | Banking
Worst market in 30 years
The investment banking industry is in its worst crisis in 30 years, and could see revenues fall as much as 45 per cent this year, according to a wide-ranging study released last week.
- By Chris Hughes, Financial Times
- Published: 00:34 April 5, 2008
The investment banking industry is in its worst crisis in 30 years, and could see revenues fall as much as 45 per cent this year, according to a wide-ranging study released last week.
A combination of writedowns on exposure to the troubled US mortgage market and weaker revenues across many investment banking business lines has already cost the industry the equivalent of six financial quarters of earnings.
Comparison
On that measure, the crisis is worse than the dotcom collapse, the Russian and Asian crises of the late 1990s, the 1994 Mexican dip and the fallout from Black Monday. It rivals the junk bond crisis of 1989-90, the most severe of the industry downturns in the past 20 years.
The grim findings come in a report by Morgan Stanley, the US investment bank, and Oliver Wyman, the financial services consultancy.
Investment banking revenues will fall 20 per cent this year, even excluding an expected $75 billion of additional markdowns, the report warns. Total revenues, including markdowns, are forecast to decline 45 per cent.
Credit business will be worst hit, with revenues falling 60 per cent. Meanwhile, mainstream investment banking revenues, mainly from corporate clients, are estimated to drop by about 40 per cent.
"Major crises in the last 20 years have lasted just four to seven quarters before industry earnings have hit the prior run rate ...
"Only once in 20 years have revenues fallen for two years in a row, as we think is likely to happen in 2007 and 2008," the report says.
Anaemic
The medium-term outlook is similarly anaemic.
Investment banks' return on equity is expected to drop substantially as a direct consequence of banks reducing their leverage under pressure from regulators.
About half of the rise in their return on equity in the past four years has come from higher leverage, the report argues.
But investment banks should return to growth in the long term: "We are hopeful that a return to prior earnings levels is still possible in the next six to eight quarters from now."
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