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Slowdown In M&A Activities Likely To Cause Drop In Profits At Large Global Banks

Slowdown In M&A Activities Likely To Cause Drop In Profits At Large Global Banks
For the first time in seven quarters, profits at the world's largest banks are likely to shrink, owing to a slowdown in mergers and acquisitions (M&A) activity and a drop in equity and debt issuance deals.
According to Refinitiv statistics, the combined net earnings of big global banks such as Morgan Stanley, JPMorgan Chase & Co, and Citigroup Inc are predicted to drop 2% in the March quarter compared to the December quarter's cumulative profits.
According to Refinitiv, this would be their first quarterly earnings drop since the second quarter of 2020.
The information pertains to the top 65 global banks, each of which has a market value of $10 billion or more.
Despite an overall increase in net interest income, analysts expect lower fee revenue and trading losses owing to market volatility sparked by the Ukraine crisis to harm first-quarter profits.
"Market volatility can make issuing equity and debt more difficult, reducing income for these areas of the business that focus on underwriting new stocks and bonds as a major revenue source," Andrew Dinnhaupt, portfolio manager at Franklin Templeton, said in a note this month.
"This could weigh on companies’ bottom lines, even if their traditional banking operations get a lift from higher (net interest income) and faster loan growth."
According to Refinitiv statistics, the total value of disclosed pending and completed deals in the first quarter reached $922 billion on Tuesday, the lowest level since the second quarter of 2020.
When compared to last year, the number of agreements in which Citigroup (C.N) functioned as bookrunner fell by 47 per cent, while those using BoFA Securities Inc and JP Morgan Chase fell by 39 percent and 36 per cent, respectively.
According to Refinitiv, global equity issuance deal volumes fell to $129 billion in the first quarter from $390 billion in the fourth quarter of 2021, as the market for initial public offerings came to a halt.
Morgan Stanley and Goldman Sachs, the two most dominant financial advisors on IPOs globally, saw their equity underwriting deal volumes drop by 80 per cent.
M&A activity fell in the first quarter, according to Bill Fink, TD Bank's head of US middle market banking, due to increased uncertainty about the Ukraine-Russia war, supply chain disruptions, and rising inflation.
"Plus the prospect of the Fed increasing rates beyond the number of times it originally projected, it's a recipe for uncertainty – and the M&A market dislikes uncertainty as it impacts purchase multiples and ultimately purchase price," he said.
Following queries about whether it would have to set aside assets to offset potential losses, Citigroup announced in February that its entire exposure to Russia is $9.8 billion. In a "severe stress scenario," according to Chief Financial Officer Mark Mason, the bank may have to write off roughly half of that sum. find out more
The earnings season for large US banks is slated to begin on April 13.

Christopher J. Mitchell

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