The battery of macro data published in the month of August has been a severe setback for the financial markets and for investment banking commission income. To begin with, because there was a larger than expected fall with PMI readings that point to a contraction of 0.2%, along with lower consumer confidence in Europe to which we must add the moderation of retail sales and the Unemployment rises to 5.7% in Germany, while eurozone inflation suffers from the rise in fuel prices, leaving behind the base effect, with an underlying inflation that declines gently.
And this slowdown in the economy has taken its toll on corporate banking activity, with a sharp drop in volumes, which has caused a 35% year-on-year decrease in fee income. The weakness reflected in July is thus maintained, when an approximate drop of 30% had been recorded, despite the fact that the results for the second quarter of the year reflected certain green shoots, since in April they grew by 5%.
Thus, although all investment banks had a weak performance at the start of the third quarter of the year, Mediolanum and UBS have been the most affected entities, according to calculations collected by Deutsche Bank. For both, the decrease would be around 60% in August. Among those that have recorded the worst performance, Barclays also stands out. For these cases the drop has been greater than the industry average. On the other hand, the entities that have registered a decrease below the average have been two Spanish ones, Banco Santander and BBVA, and the financial giant HSBC.
On the other hand, Nordea and Danske would be the banks within the European comparison that would have closed August with positive income in this section, a positive traction that would also be maintained so far this month and would allow these entities to record a year-on-year increase. year at the end of the third quarter. In fact, in the case of Nordea the improvement would be close to 20%.
IPOs and corporate operations, the most affected
Regarding the sections where this income has fallen the most, two stand out: IPOs and mergers and acquisitions, with a decrease of 42% and 41% respectively. Precisely, PriceWaterhouseCoopers pointed out that already at the beginning of the year it was expected that the possible recession resulting from the increase in interest rates by central banks would put M&A (mergers and acquisitions) operations on ‘stand by’. A fact that has been seen in the first half of the year if we take into account that trading volumes have registered a decrease of 4%, compared to the end of 2022.
For the remainder of September, the most significant decreases would be recorded in commissions from mergers and acquisitions and syndicated loans. However, it would be those made for issues in the capital market that would experience positive, double-digit growth, after the decrease experienced in August of this year compared to the eighth month of last year. It must be remembered that 2022 also led to a drop in investment banking commissions, 41%, however, the mergers and acquisitions section shot up 84%.
Although the best year corresponded to 2021. Specifically in the section of investment banking commissions, growing by 39%, thanks to the ‘boom’ of SPACs and the income from this type of operations, and whose first steps were taken in 2020. The strong activity in syndicated loans also had an influence, allowing entities such as Barclays HSBC to fill the ‘piggy bank’.
In conclusion and looking towards the end of the year, investment banking commission income could remain depressed if a series of risks are met, among which stands out the confirmation of the economic recession for the eurozone, a high beta of deposits, something that the entities do not seem to contemplate, or an increase in loans at losses. There are also other risks such as political risks (in Spain the results of the elections paint an uncertain picture) and regulatory risks that would affect this type of corporate operations, but also IPOs. On the other hand, a soft landing of the economy or a greater volume of credits would work in its favor. As well as maintaining asset quality.