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Coronavirus Induced Uncertainty to Hurt Banks' Advisory Fees

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The coronavirus pandemic has led to the curtailment of businesses and consumer activities. As a result, advisory fees are likely to have been negatively impacted due to a slowdown in mergers and acquisitions and initial public offerings.

The stock market continues to tumble, with Dow Jones Industrial Average and S&P 500 recording 3% fall each in the last trading session.

Shutdown of manufacturing facilities, disruptions in supply chains and unimpressive lending scenarios have resulted in heightened concerns of a recession and global economic slowdown, which are likely to have kept corporates from entering deals and issuing IPOs.

Also, with coronavirus continuing to spread in the United States, companies are expected to shutter branches to maintain social distancing and make non-customer-facing staffs work from home. Thus, the firms may face problems adhering to the deal-making formalities such as due diligence.

Per data released by Refinitiv, the deal value of the globally announced mergers and acquisitions (as of Mar 12, 2020) has declined about 9%, with Goldman Sachs (GS - Free Report) leading the show and JPMorgan (JPM - Free Report) following closely. Other Wall Street biggies such as Morgan Stanley (MS - Free Report) and Citigroup (C - Free Report) have been able to garner some of the deals. Thus, firms are expected to report declines in advisory revenues in the first quarter of 2020.

Since the fourth quarter of 2018, global M&A deals’ volume has been witnessing a slump, owing to an increase in borrowing costs and several continued geopolitical concerns. Now, with the virus outbreak-induced volatility, we expect  the trend to continue at least in the near term.

In fact, the virus outbreak pushed the Federal Reserve to lower interest rates to zero. Lower interest rates are known to curb interest income for finance companies. Thus, several analysts and firms have cut sales and earnings forecasts for 2020, accounting for the financial impacts of the novel coronavirus outbreak.

Though the strict regulations imposed on finance companies post the 2008 financial crisis keep them well-poised to deal with such stressful scenarios, the firms are making efforts to keep sufficient capital and liquidity to remain afloat.

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