The majority of sectors, including Automobiles, Airlines and Energy, are bearing the brunt of the turmoil in the broader economy caused by the coronavirus pandemic. The broader Finance sector, of which banks constitute a major part, is also not untouched. Various banking activities, including lending, have been badly impacted in the second quarter.
Particularly, among others, the investment banking division has been hit hard due to the economic slowdown. Notably, the division comprises mergers and acquisitions, advisory services and securities underwriting.
On coronavirus concerns, in the second quarter of 2020, the curtailment of businesses and consumer activities continued, leading to a decline in global M&As and an unimpressive demand for IPOs.
Several companies have suspended their expansion plans to maintain sufficient liquidity and healthy balance sheet position to counter tough economic challenges. Notably, the number of global M&A deals announced stooped down to the lowest quarterly number since third-quarter 2004.
Further, impacted IPO activities during the quarter led to lower deal numbers and thus proceeds. Per the Financial Times’ data, advisory fees from IPOs worth $180 billion collected in the second quarter tumbled 22% year over year.
However, the quarter noted a surge in follow-on offerings, as the Federal Reserve reduced benchmark interest rates to near zero to support the U.S. economy during the current virus outbreak-induced slowdown. This is likely to have made it less expensive for companies to raise additional capital through follow-on offerings. Thus, fees from equity underwriting witnessed a considerable rise in the quarter, which is expected to support top lines for investment banks.
Also, investment-grade U.S. corporate debt issuance witnessed a boost during the quarter, with support from the Fed’s bond purchase program that began on Mar 23, as companies took this as an opportunity to bolster their balance sheets. Notably, the debt origination fees rose to a record-high level of $740 billion, up 60% from the prior-year quarter.
Therefore, investment banks including Goldman Sachs GS, Morgan Stanley MS, JPMorgan Chase JPM, Citigroup C and Bank of America BAC, which records significant share of revenues from underwriting business are expected to be benefitted.
Overall, with the expected gradual recovery of the U.S. economy in the second of 2020, a rise in M&A activities is more likely as the companies would aim to regain lost footing by expanding through acquisitions. Further, underwriting and other advisory activities are likely to continue gaining momentum in the remaining months of 2020.
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