European Crisis Dents Bank Revenue

According to Reuters, global investment banks are facing declining investment banking fee income, bearing the brunt of the amplifying Eurozone crisis. Concerns have crept up in the slothful stock market momentum.

According to the source, in the first half of 2012, global investment banking fee income fell 25% from the year-ago period to $32 billion. Moreover, fee income stood at $14 billion in the second quarter of 2012, down 22% sequentially. The current figure depicts the lowest level of fee income since the beginning of 2009, reflecting uncertain outlook for the global economy.

Major investment banks, including Bank of America Corporation (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), The Goldman Sachs Group Inc. (GS - Analyst Report), Credit Suisse Group (CS - Snapshot Report), Barclays PLC (BCS - Snapshot Report), Deutsche Bank AG (DB - Snapshot Report), are expected to feel the pressure of the dipping fee income in their upcoming quarterly earnings results.

Coupled with the falling fee income, the crisis has hit hard securities underwriting and merger activities of the financial institutions. However, we can expect the income from retail divisions and wealth management wings to comfort banks in their earnings, but the downfall of investment banking division would be a blow.

Lower industry revenue has been forcing these banks to cut costs in order to stay afloat. As a result, banks will continue cutting jobs and reducing the size of operations by selling non-core assets. So, any cost-cutting measure will act as a defense.

Precisely, Reuters reported, the total number of layoffs by top investment banks has summed up to nearly 130,000 over the last one year. Owing to the effect triggered by the Eurozone crisis, the banks are cutting jobs in various divisions to curtail costs. Moreover, new regulations and market volatility has added to the woes.

If the crisis continues further, there will be significant impact on worldwide capital markets. On the other hand, the extremely low interest-rate environment is another manifestation of this uncertain macro backdrop. Concerns about the European finances and soft U.S. growth prospects have made treasury instruments the choice of safe asset class. As a result, the yields on benchmark treasury bonds are hovering at low levels.

We don’t expect the potency of the sector to return to its pre-recession peak anytime soon. The economic intricacies may even result in further disappointments in the upcoming quarters.