Damn if feels good to be a banker, again. After all those years of torpor, things are changing for the better. 2017 will be great...etc. etc.
At least, this is what the banking analysts at Barclays think. They've reportedly issued a note suggesting that political events and economic variables will continue feeding the investment banking revenue beast in 2017. If all goes to plan, the coming 12 months should therefore be months of "upside" for banks and all who sail in them.
That's the jolly version of 2017. Chirantan Barua, bankig analyst at Bernstein Research, isn't approaching this year with quite such unfettered optimism, but he is mutedly hopeful. This is why...
1. Banking is back
Barua thinks the banking cycle is turning (for the better). After five quarters of negative year-on-year revenue growth, Barua suggests the third quarter of 2016 marked the start of something more positive. Banks are due to report their fourth quarter results at the end of this month. All indications are that the Q4 results will be positive too. Past experience suggests the upturn should last anything from seven to 18 quarters.
Source: Bernstein Research
2. But you might want to cash out of European bank stocks if you can
Barua is less positive about European than U.S. banks, however. As the chart below shows, most bank stocks have risen significant since the U.S. election in November. This is good news for anyone who holds stock issued in banking bonuses past, and is able to sell it. It's less good news for everyone who's about to receive stock-based bonuses at current high prices: if prices fall, so will 2016's stock-based bonuses.
Barua thinks this is a particular risk for European banks like Barclays, UBS and Credit Suisse, which have been caught up in the post-election enthusiasm for finance stocks. This optimism surrounding U.S. banks looks less valid for the Europeans and he says they're in particular danger of falling when reality reasserts itself.
Source: Bernstein Research
3. It's a good time to work in M&A: the cycle is turning for the better...
If banking analysts agree on one thing it's this: M&A will be big in 2017.
Like investment banking revenues as a whole, M&A revenues are ripe for turning. Barua predicts that dealmaking will pick up in 2017 as cash is repatriated to the U.S. and corporates there look to put it to use. Deutsche's researchers were equally bullish in a note before Christmas, predicting that purchasing opportunities will crop up as returns widen: "For too many years poor quality companies have been disproportionally expensive and good ones not expensive enough. This has stymied the mergers and acquisitions market because it makes the numbers harder to add up."
Source: Bernstein Research
4. It's a bad time to work in DCM: the cycle is turning for the worse...
If M&A bankers are in for a fine year, debt capital markets bankers are not. Barua thinks DCM revenues are about to come off their peak.
The simple reason for this is widening credit spreads. As J.P. Morgan's analysts pointed out in December, widening credit spreads are typically bad news for riskier "yield" products, demand for which typically falls as their prices fall and yields rise. This makes investors jittery when it comes to buying new bonds - especially in the high yield market.
Barua says strong DCM revenues in 2016 were symptomatic of issuers' rush to refinance existing debt before spreads widen. Now that this refinancing has already happened, 2017 could be a bit bleak in DCM divisions.
5. It's a good time to work in U.S. equities, less so in Asia and Europe
How about equities? J.P. Morgan's analysts are predicting good things in cash equities - especially when electronic cash equities are added in. Their December predictions were for a 4% increase in cash equities revenues this year, after an expected 17% decrease in 2016.
In fact, 2016 may not have been that much of a bad year for cash equities. The Wall Street Journal says last year's stock trading volumes were the highest since 2011. Whether this plays into universally high cash equities revenues in 2017 is open to question, however. Barua says the strength of equities revenues in 2017 will depend upon "portfolio churn" and this has so far proved higher in the U.S. than in Asia or Europe.
6. It's probably going to be a bad year to work in credit
While equities trading (probably) picks up, credit trading will (probably) slowdown for the reasons given above (ie. widening spreads).
7. In light of its recent performance, 2017 might be a stressful year to work in Deutsche Bank's M&A business
Lastly, at the start of 2017 it's worth casting an eye over the chart below from Thomson Reuters. Charting the changes in M&A rankings by bank over the past decade, it reflects the consistent strength of Goldman Sachs compared to the oscillating fortunes of other banks (Bank of America Merrill Lynch) and the recent dire performance of Deutsche Bank. Deutsche has consistently slipped down the rankings since 2012. The second chart below (from Dealogic) suggests the Deutsche rout extends to ECM and DCM too. 2017 could see Deutsche confront some awkward truths.
Global M&A rankings over the past decade:
Source: Thomson Reuters
Photo credit: Death Valley Compass by Kolby is licensed under CC BY 2.0.