The world's top 12 investment banks posted their best first-quarter revenues in six years despite more than $6 billion in losses linked to collapsed U.S. hedge fund Archegos, which hit equities trading, new research by Coalition Greenwich shows.

In 2021 as a whole, the sector is expected to cope well with the Archegos fallout even though some banks will still book residual losses in the second quarter, according to Coalition Greenwich corporate and investment banking research director Youssef Intabli.

Full-year equities revenues are difficult to project from a current standpoint but in the first half of 2021 they should be above the weak prior-year result which was marred by dividend losses and stock deleveraging by quantitative traders, Intabli said in a written comment. Second-half equities revenues are expected to either be at or slightly above their 2020 level, he said.

In the first quarter, overall investment bank revenues increased 39% year over year to $62.9 billion, according to the latest sector index of Coalition Greenwich, an S&P Global company. The index tracks U.S. groups Bank of America Corp., Citigroup Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Europe-based banks Barclays PLC, BNP Paribas SA, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Société Générale SA and UBS Group AG.

Growth was booked across business lines with investment bank division revenues recording the highest year-over-year increase, of 73%, thanks to a recovery in M&A deal volumes and a wave of new special purpose acquisition company, or SPAC, listings, Coalition Greenwich said.

Excluding Archegos-related losses, the banks' equities trading revenues rose 63% year over year to roughly $17.7 billion, one of the best quarterly results booked in the last decade. Although at a more moderate pace compared to a year ago, fixed-income, currencies and commodities trading revenues still grew — by 15% year over year.

Archegos costs banks billions

The asset sell-off prompted by a margin call at Archegos in late March shaved off more than $6 billion of the sample banks' first-quarter equities trading result, reducing revenues booked in that business line to about $11.5 billion, or 6% higher than a year ago.

The Archegos-related losses affected primarily the prime services business, which performed well otherwise, boosted by higher prime brokerage balances and elevated client activity, according to Coalition Greenwich. "We do not expect Prime overall to underperform in the second quarter," Intabli said.

In fact, second-quarter prime services revenues are expected to be above the prior-year result, which was weakened by quant deleveraging and Delta One product losses in EMEA, Intabli said. Delta One products are financial derivatives that have no optionality and therefore their prices change in line with price changes of their underlying securities.

First-quarter equities trading revenues were also boosted by a surge in cash equities, where revenues were driven by "robust volumes and increased client activity in the U.S. and Asia", while client activity in EMEA was more muted compared to a year ago. Equity derivatives performed well in the first quarter, too, thanks to a rebound from prior-year trading losses and heightened client activity. Revenues from futures fell year over year as FICC futures volumes continued to weaken amid the low interest rate environment.

M&A renaissance amid SPAC boom

With M&A rebounding after the U.S. presidential election and positive vaccine news in the fourth quarter of 2020, so did investment bank revenues in this line of business. The recovery continued over the first quarter of 2021, with a "noteworthy improvement" in M&A revenues and increased deal completion activity toward the end of the period, Coalition Greenwich said.

The active SPAC market in the U.S., where first-quarter SPAC IPO volumes exceeded the 2020 annual total, led to exceptionally strong equity capital market, or ECM, revenues at the top 12 investment banks. Debt capital market revenues also grew on the strong investment-grade and high-yield bond underwriting result.

These developments propelled overall investment bank revenues to their best first-quarter result in six years, of $17.1 billion. The second-quarter outlook is also positive, according to Eric Li, head of transaction banking at Coalition Greenwich. "While U.S. SPAC volume is declining in the second quarter, the IPO and [equity capital] market is expected to be very strong," Li said in a written comment.

Coalition Greenwich expects the street fee revenues to be continuously benefited from the SPAC business for the next two years with banks standing to gain between $8 billion and $10 billion in revenues during that period, according to Li.

Commodities maintain FICC gains

Trading in macro and rates products, which was the main driver for the surge in FICC revenues amid the pandemic in 2020, continued to normalize over the first quarter with both G-10 foreign exchange rates and emerging markets macro products booking lower revenues than a year earlier. On the other hand, revenues from spread products — such as asset-backed securities and high-yield bonds — continued to grow, boosting overall FICC revenues.

A key driver for first-quarter FICC revenues was the strong performance in commodities, where a surge in energy and metals trading revenues outpaced the weaker result from oil trading.

Coalition Greenwich is a business division of CRISIL, which is part of S&P Global Inc.