You guessed it–fees. From Reuters:
June 26th, 2009
Fee bonanza spells more trouble for banks
By: Alexander Smith
Alexander Smith is a Reuters columnist. The views expressed are his own
Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they’ve had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday.
True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching–often in disbelief–the huge amount of capital raising that has been going on in both the equity and bond markets.
Take the bond markets, where total first-half issuance–excluding financials–has already reached $598 billion, outstripping previous records for an entire year. If anyone pretends it has been tough selling these bonds, don’t believe them. The sales teams have been pushing at an open door, with fund managers buying anything they could get their hands on. The fees are good and so far this year, the risk has been limited.
The ones to suffer have been the loan desks, with syndicated lending hitting a 13-year low. But since this market has always been seen as a loss-leader to help sell other products, there are probably fewer tears being shed at the top of the banks involved.
The real star of the show, however, has been equity capital markets. Traditionally the poor cousins to the sexier and higher profile “rainmakers” in mergers and acquisitions, ECM desks have raked in underwriting fees of $7.6 billion in Q2 alone, almost half the industry total. As with bond issues, lead managing or underwriting such deals does carry a risk, but so far this year that has been limited as shareholders have lapped up the rights issues.
There’s no denying that many companies badly needed capital and that the banks have the expertise to get these deals done. The question that will increasingly be asked is whether the fee structure can still be justified. True, rights issues can fail, as underwriters of the 4 billion pound offering by British bank HBOS last year no doubt recall. But with banks charging bigger fees and pricing offerings at larger discounts, the rewards currently outweigh the risks.
One area of investment banking which is still in the doldrums is M&A, despite the best efforts of some of the brightest minds in the game to get dealmaking back on track.
The Thomson Reuters data shows global M&A revenues declined for a third consecutive quarter, with fees on completed deals down some 66 percent on the same period last year at just $3 billion. M&A activity–measured by the value of deals done–is down almost 45 percent so far this year, the lowest figure since 2003 and the sharpest fall since 2001.
Of course, it is possible that these big fees will be wiped out by continued losses on the toxic assets that some investment banks still have on their balance sheets. But for an industry that was teetering on the brink last autumn, investment banking appears in rude health. With a second backlash already beginning as salaries rise and bonuses come back into fashion, the big investment banks–particularly those which still owe taxpayers money or government shareholders–will need to make sure their lines are well rehearsed.
At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.