Weekly Brief: You’d Think Banks Would Be Pleased Rates Were Rising, But…

Weekly Brief: You’d Think Banks Would Be Pleased Rates Were Rising, But…

over 1 year ago3 mins

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Investment banks have faltered after their long run of mid-pandemic success, and even rising interest rates aren’t going to fix this.

🕰 Recap

  • JPMorgan and other big US banks faced a tough start to the year, reporting first-quarter earnings that were worse than expected
  • And things aren’t looking up any time soon, as this year’s market volatility pushes companies to abandon mergers and acquisitions
  • That’s expected to dent investment banks’ dealmaking revenue, so it might be risky that some of them have now decided to up their shareholder payouts

✍️ Connecting The Dots

Investment banks’ dealmaking businesses – often their biggest profit-spinners – make money in three main ways: advising on mergers and acquisitions (M&A), helping firms raise debt, and helping companies issue new shares. But dealmaking activity across the three has slumped this year on the back of heightened market volatility, global economic uncertainty, and the outbreak of war.

Take M&A, for example. Global uncertainty has encouraged more and more companies to hoard cash, which is partly why the value of abandoned deals recently hit $286 billion – its highest level since before the pandemic. That helps explain why the total value of M&A in the first half of the year was down by 20% compared to the same period last year. And that drop would’ve been even worse had it not been for the 25 “megadeals” – those worth over $10 billion – announced during the period.

Bonds and share issuances have slumped too. Higher interest rates increase the cost of new debt, after all, while falling stock prices means would-be issuers of new shares get less bang for their buck. Put it all together and global businesses raised “just” $4.9 trillion through new debt and shares issuances in the first half of 2022 – down 25% from a year ago. Share sales were hit the hardest, with their total value down nearly 70% to $252 billion. That’s the smallest amount raised in the first six months of a year since 2005.

🥡 Takeaways

1. Banks’ lending businesses won’t plug the gap.

You’d think that higher interest rates would offer banks some relief by increasing the profits of their lending businesses, but that’s not entirely true. See, banks borrow money at cheap short-term interest rates (via customer deposits, for example), and then lend that money out at higher long-term rates (in the form of, say, 15-year mortgages). So a bank’s lending profit is mostly determined by the difference between those short-term and long-term rates, which you can assess by looking at the difference between 2-year and 10-year US government bond yields. That’s down from 0.8% at the start of the year to virtually zero today, which suggests banks’ lending profits could also soon be about to fall.

2. Show shareholders the money.

At least banks had one piece of good news this month: all 33 of America’s biggest banks passed the Fed’s annual stress test, which gauges each lender’s ability to weather a severe economic downturn. That paved the way for them to boost their payouts to shareholders. But while the likes of Goldman Sachs and Morgan Stanley decided to do just that, some – like JPMorgan and Citigroup – were more cautious, keeping payouts flat. All in all, analysts think US banks will return as much as $80 billion to shareholders this year.

🎯 Also On Our Radar

The NFT market has been sliding after sales sank sharply and the prices of popular NFTs plummeted in the last few weeks. Last month was the first where the market recorded under $1 billion in sales in a year, with OpenSea – the world’s biggest NFT marketplace – experiencing a 75% drop in the number of sales since May. The prices of top-selling NFTs have slipped too: the JPG NFT Index – which tracks the prices of a handful of blue-chip NFT projects – is down by more than 70% since its inception in April.

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