Advisory revenues dropped across major US and European investment banks in the second quarter as the global industry wallet shrunk to its lowest level since 2016.

Leading banks, including Bank of America Corp., Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, all posted year-over-year declines in advisory revenues for the second quarter of 2023, their latest earnings reports show.

For the investment banking industry as a whole, the second quarter marked the slowest three-month period for revenues since the first quarter of 2016, according to data provider Refinitiv. First-half revenues also dropped to a seven-year low, shrinking 17% year over year to $50.5 billion, which was driven by a 36% drop in advisory revenues, the company said. Rising interest rates and weak macroeconomic growth stifled M&A activity in the first half.

Global investment banking revenues will likely remain weaker in 2023 mainly due to declining M&A revenues, according to Eric Li, research director at Coalition Greenwich, a division of CRISIL, an S&P Global company.

"At the moment, with the uncertainty in terms of what the terminal interest rates look like, most of the corporates are not willing to make very big strategic decisions. So, we expect very weak M&A," Li said.

Dealmaking could pick up in the second half as inflation eases, interest rates near their peak and the economic backdrop brightens across key markets, PwC said in its midyear M&A review. Still, higher financing costs are fueling a pricing gap between buyers and sellers, and concessions would have to be made on both sides, the company said.

Senior bank executives said they expected M&A to rebound sometime in the next few quarters, though the business environment is still too uncertain to pinpoint the exact timing of a recovery.

"There's a lot of pent-up demand for M&A, but it's hard to predict when that pipeline will unlock," Citigroup CEO Jane Fraser said on an earnings call July 14. Goldman Sachs CEO David Solomon echoed these comments, saying, "there's more M&A dialogue," but he cannot be sure what the journey to recovery looks like.

Morgan Stanley and Deutsche Bank executives said they see a likely rebound in 2024. "Current conditions remain encouraging, certainly for the medium-term outlook and especially for 2024," Morgan Stanley CFO Sharon Yeshaya said on a July 18 earnings call.

Debt, equity underwriting trends

Investment banking revenues in 2023 will also be affected by "very weak" high-yield debt issuance, which is expected to hamper debt capital markets (DCM), Li said. Despite sluggish IPO activity, equity capital markets (ECM) revenues in 2023 are expected to grow 15% to 20% from the very low levels of the previous year, Li said.

Most major banks in the sample that report ECM revenues separately posted year-over-year growth in second-quarter ECM revenues. "We saw some signs of reopening in the capital markets, although volumes continue to remain well below medium and long-term averages," Goldman Sachs CFO Denis Coleman said on a July 19 earnings call.

The majority of the top-tier banks sampled reported an increase in total second-quarter investment banking revenues compared to a year ago, with European banks outperforming their US peers.

The improved performance at French banks Société Générale SA and BNP Paribas SA was driven by strong transaction banking income, while DCM contributed to the revenue growth at Deutsche Bank, the UK's HSBC Holdings PLC and France's Groupe BPCE.