Major US and European groups are set for further cuts to their dealmaking teams in late 2023 and early 2024 amid an expected tardy recovery in advisory business.

Weak global M&A activity so far in 2023 has been a key drag for investment banking revenues at most of the largest global sector players. Bank of America Corp., Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley posted third-quarter advisory revenue below the prior-year level, S&P Global Market Intelligence data shows.

The banks, along with market observers, expect a recovery in advisory revenue sometime in 2024, but they caution that business is likely to remain sluggish for at least the first few months of the year. The longer revenues take to rebound, the bigger the struggle for banks to maintain productivity, increasing the possibility of further head count cuts.

"[Banks] are looking at their staff right now, thinking how many people they are going to need in the second half of 2024 when, hopefully, things get better," Alan Johnson, managing director of compensation consulting firm Johnson Associates, told S&P Global Market Intelligence.

Some further trimming is expected at big US banks by the end of 2023, but reductions could extend into 2024 if revenues do not pick up by the second quarter of next year, Johnson said.

Productivity woes

Banks were left with too many employees and too little business after a sharp drop in M&A and capital markets issuance activity in 2022, coming off the record highs reached in the previous year. Head count cuts made earlier in 2023 were not enough to offset the sharp fall in revenues as productivity has halved since a peak in 2021, research company Coalition Greenwich said in its latest sector report.

Productivity — measured as total revenue per employee — at the advisory and capital markets business units of the 12 leading global investment banks tracked by Coalition Greenwich fell to $900,000 in the first half of 2023 from $1.8 million in the same period of 2021. Coalition Greenwich, part of S&P Global, tracks the performance of Bank of America, Barclays, BNP Paribas SA, Citigroup, Deutsche Bank, Goldman Sachs, HSBC Holdings PLC, JPMorgan Chase, Morgan Stanley, Société Générale SA, UBS Group AG and Wells Fargo & Co.

– Access equity capital market and debt capital market statistics on S&P Capital IQ Pro. – Download an industry document detailing historical investment bank revenues. – Access detailed M&A market statistics on S&P Capital IQ Pro.

Apart from big US banks, UK-based group Barclays also plans further cuts, with 50 senior jobs scheduled to go in its advisory and capital markets business due to the revenue drought, Financial News reported Oct. 5.

Barclays posted the steepest drop in third-quarter advisory revenue among major US and European investment banks, compared to both the previous quarter and the prior-year period, Market Intelligence data shows. The UK group's performance in capital markets underwriting was also among the weakest in the peer group, with revenue dropping nearly 14% quarter over quarter and 23% year over year, the data shows.

Overall advisory and capital market revenues remained more muted across big US banks, and some European banks, such as HSBC and BNP Paribas, saw stronger growth in the third quarter. Deutsche Bank's overall result was skewed by one-off markdowns booked in debt origination in the third quarter of 2022, which makes it difficult to compare with revenue generated in the third quarter of 2023.

2024 outlook

While equity and debt capital markets revenues have seen some growth in the third quarter, they still far from fully recovered. IPO activity, which collapsed in 2023, remains subdued, and equity capital market revenues at big investment banks have been driven primarily by follow-on and convertible issuances, market observers said. As with advisory, they expect IPO activity to pick up sometime in 2024, depending on the macroeconomic backdrop, market volatility and the interest rate environment.

Companies have been holding off on debt and equity issuances as well as M&A deals for a fairly long time now, and pent up demand for refinancing and acquisitions should help drive a revenue recovery in 2024, Gaurav Arora, head of corporate and investment banking research at Coalition Greenwich, said in a written comment.

A third of the M&A market typically is financial sponsor-related, and financial sponsors are sitting on some $4 trillion of dry powder, according to Ronan O'Kelly, head of Oliver Wyman's European corporate and institutional banking practice. "They will have to deploy that at some point," O'Kelly told Market Intelligence.

As there is greater certainty on the rate environment and valuations, Oliver Wyman expects to see M&A activity revive in 2024, with overall advisory and capital markets revenue pools expected to grow by about 20%, assuming a soft-landing macroeconomic backdrop, O'Kelly said.

The revenue recovery is likely to pick up steam in the second half of next year when the rate and macro landscape are expected to be more stable, Arora and O'Kelly said.