If you're hoping to find a new front office banking job in 2016, you might want to avert your eyes from the charts below.
Produced by the European banking analysis team at Sanford Bernstein, they outline why banks' key businesses could falter in the year ahead. If the analysts are right, 2016 will be bad in M&A, bad in debt capital markets, and bad in equities sales and trading. In total, they think revenues in investment banks could be off by up 30% this year. Here's why.
As the chart below shows, after a lag M&A is driven by growth in Gross Domestic Product.
However, global GDP growth is weakening and is expected to turn negative from this year, and M&A is therefore expected to suffer.
During yesterday's conference call to accompany J.P. Morgan's fourth quarter results, CFO Marianne Lake said deal flow had suffered as a result of the uncertainty at the start of this year. The M&A pipeline is strong, said Lake, but this year's deals will be smaller and more cross-border than last year's mega-deals.
Source: Sanford Bernstein
Bernstein's analysts also suggest that M&A will suffer from declining valuations in 2016. The peak was in 2014, they suggest. That drove deal-making last year, but matching buyers and sellers will get harder from now on as valuations fall.
Source: Sanford Bernstein
Debt capital markets revenues fell 43% at J.P. Morgan in the fourth quarter of 2015. If Bernstein's analysts are right, there will be a lot more of this to come. They predict that DCM mandates coming from private equity firms are going to taper off and that the refinancing cycle in the US peaked in the third quarter.
Meanwhile, fixed income revenues - which should benefit from rising interest rates, probably won't.
Volatility won't lead to rising FICC revenues because, 'banks are not putting balance sheet to work as they are still solving for capital problems,' say Bernstein's analysts.
Nor will FX revenues fill the gap: "FX, which we thought could be a bright spot given the volatility, could also undershoot as banks aren’t as keen to make markets in currencies where a central bank intervention could put you in a deep offside position."
Lastly, Bernstein's analysts aren't exactly upbeat about equities revenues either. As the chart below shows, the higher the VIX, the lower are revenues in equities sales and trading. And the Vix is rising...
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