[LONDON] Global investment banks' earnings may decline this year, given a challenging credit trading environment and low level of deal flow, said JP Morgan Securities analysts, who cut their 2016 earnings estimate for investment banks by an average 20 per cent. "We believe the Q1 IB revenue environment has started on a challenging note with limited issuance activity and widening credit spreads," said analysts led by Kian Abouhossein, who estimate revenues to decline 21 per cent in 2016.
The current turmoil in global equities and commodities markets has made it harder for investment banks to make money in traditional business lines. The MSCI all-world stocks index has declined 9.5 per cent since the start of the year.
Global investment banks' cash equities revenues may fall as the recent decline in equity markets indicates volumes are not healthy, the analysts wrote in a note to clients. "Our earnings cuts for 2016E also incorporate our view that if there is market normalisation, it could be followed by a period of lower market activity as we have witnessed in past sell-offs, thus impacting IB revenues," they added.
JP Morgan analysts, who upgraded Goldman Sachs Group Inc and Morgan Stanley to "overweight", said they see better value in US investment banks owing to their "excellent capital position." Goldman and Morgan Stanley are both likely to buy back about 23 per cent of shares and lower net share count by about 15 per cent through 2018, said JP Morgan analysts, naming Goldman their top pick among US investment banks.
They, however, downgraded Credit Suisse Group AG to "neutral" from "overweight," as they expect credit and securitized products trading revenues to remain weak on further widening in spreads.
JP Morgan named Deutsche Bank AG its top pick among global investment banks, saying it sees no liquidity or funding concerns and that the current negative market sentiment towards the German bank was overdone.
For 2017, JP Morgan expects global investment banks'revenues to grow 7 per cent.