Capital markets bankers pin hopes on back-loaded Q3

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US-based Jefferies opened the investment bank earnings season on September 20, though it reports to a different schedule to most of its peers, with a third quarter that ends on August 31.

Its sales and trading revenues soared by 86% year-on-year but fees earned from more traditional investment banking lines were down by almost a quarter, due to slow primary activity in the capital markets. However, Jefferies‘ chairman and CEO Richard Handler and executive committee chair Brian Friedman noted that new issuance for the bank’s fourth quarter represented “the highest level of backlog we have experienced this year”.

For Jefferies’ US and European peers, which in October will start reporting results for the calendar third quarter, September gains will be more important than usual after the traditional summer slowdown was exacerbated by the UK’s June 23 vote to leave the European Union.

Chris Wheeler, a banks analyst at Atlantic Equities, said that while activity in the equity capital markets was “still very weak”, the pipeline for deals remained strong. He said debt capital markets revenues would likely rise in the third quarter year-on-year, adding “we’ve seen activity pick-up in the last few weeks”.

Deutsche Bank analysts led by Kinner Lakhani wrote in a September research note that they expected a “back-loaded quarter”. They wrote: “September appears to have experienced a strong across-the-board pick-up in primary activity.”

Analysts at rival UBS, led by Daniele Brupbacher, meanwhile, wrote in a third-quarter research note that “it’s always about September”. They expected “further acceleration” in the capital markets, “most notably in lending, which typically shows strong seasonal patterns in Q3, with lower volumes followed by a backfill in September”.

Bankers have already welcomed a pick-up in activity during recent weeks. In the UK, a number of companies have announced plans to float, with a capital markets lawyer telling FN that bankers were “off-their-feet busy”.

At a conference held by Barclays in New York in mid-September, Christian Meissner, Bank of America Merrill Lynch’s head of global corporate and investment banking, said that the industry had seen a “steady recovery” in 2016 since a “pretty slow” first quarter, adding that “the second quarter was much better than the first and the third quarter, again, is proving to be a better quarter from a revenue and activity perspective”.

Equity capital markets activity remained “very sluggish”, he said at the time, but M&A had “picked up steam” and leveraged finance had seen “significant improvements”.

On the trading side, too, bankers are hopeful of an upturn. At the same Barclays conference, Citi chief financial officer John Gerspach said that stronger performances from rates and currencies should mean that third-quarter trading revenues will rise by mid-single digits, compared to a year earlier, when the bank posts quarterly earnings on October 14.

Deutsche Bank’s analysts wrote that “FICC has generally held up better through typical summer seasonality”, while at UBS, Brupbacher and colleagues noted “pockets of improvement” in credit, rates and Asia Pacific equities.

Additional reporting by Lucy Burton

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