Now that all the big investment banks (JPMorgan, Goldman, Citi, Bank of America and Morgan Stanley) have reported their third quarter results, there's more clarity on the performance of investment bankers working in M&A and debt and equity capital markets.
As the chart below shows, the clarity is not reassuring. Revenues in the investment banking division fell everywhere in the first nine months of 2023. And they fell proportionately more at Goldman Sachs and Morgan Stanley (17% and 18% respectively) than elsewhere.
While investment banking division revenues at the major players are down dramatically, headcount is not. Banks don't break out investment banker headcount specifically, but data released last week by research firm Coalition, suggests investment banker headcount across the industry fell only 4% year-on-year in the first half, which is when many of the cuts at Goldman and Morgan Stanley took place. Even allowing for a few more cuts in the third quarter, front office banker headcount has clearly not fallen to the same extent as fees.
The reason for the discrepancy is clear: banks expect revenues to rebound and don't want to be caught out. "Investment Banking activities are well below 10-year norms. I don't think that will stay that way," said Goldman Sachs CEO David Solomon yesterday. Speaking last week, Citigroup CEO Jane Fraser observed that investment banking downturns typically last no more than seven quarters "because that's often how long it takes for pricing expectations to fully adjust to new realities." We're now seven quarters into the current downturn, said Fraser. The recovery is due.
That doesn't mean the recovery is coming. For all Solomon's ebullience, Goldman also said its investment banking fee backlog is now "lower compared with both the end of the second quarter of 2023 and the end of 2022." Fraser said the market is "fragile"; deals that were expected in Q4 may now move to Q1.
Alastair Borthwick, CFO at Bank of America perhaps put it best. "Investment Banking can come back very, very quickly to a more historical range of $1.3 billion, $1.4 billion, $1.5 billion per quarter," he said yesterday. "-It's just that we've grown tired of predicting when that might be." In third quarter of 2023, BofA's investment banking revenue was....$743m.
For the moment, then, banks are stuck in a bind when it comes to hiring and firing bankers. They have far too many of them for the current size of the market. Despite a few successful IPOs and some better times for debt issuance, the comeback isn't upon us. Given current 'macro headwinds' and geopolitical events, it could be a while. But it will come. "I do believe that the capital markets and banking environment will improve in the coming years," declared Solomon, hopefully.
The outlook for investment banking jobs is therefore cloudy. We're still in a holding position. No one wants to cut to the bone, but no one wants to add headcount either. Expect one in, one out for a while. Unless you're Jefferies, Santander or Deutsche Bank, in which case this does not apply.
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