Investment banking performance and the Global Markets​

By Jake Rickman​

What do you need to know this week?

Some of the world’s largest investment banks have begun to post their Q1 2023 earnings, including:
Other investment banks like Morgan Stanley are due to release their Q1 2023 earnings in the next few days.

On the whole, performance results are…mixed. Some banks fared okay (Bank of America’s year-over-year (YoY) earnings were up 15%), whereas others have not (Goldman Sachs’s YoY net earnings are down 19%).

This marks the first period in some time where many of the world’s largest investment banks have struggled across most of their various business segments. Explanations for the deteriorating performance can be reduced to two core factors:
  1. Global market uncertainty arising from volatile inflation and the resultant interest rate increases have led to a slowdown in M&A deals and private equity acquisitions, IPOs, borrowing, and bonds issuances, which investment banks depend upon to generate their advisory fees, which greatly contribute to their bottom-line.
  2. The surging interest rates have prompted the investment banks’ commercial banking clients to move their deposits out of current accounts into money market funds, which offer higher returns on savings. This has been further spurred on by market panic related to the collapse of the US commercial bank SVB and the fire sale of Swiss bank Credit Suisse to UBS. As a consequence, investment banks have less money on hand to lend out at higher interest rates.
In response, most of the world’s largest banks (including Bank of America despite their relatively strong performance) are responding by slashing jobs across many of their business divisions.

Why is this important for your interviews?

For good or bad, the market — which includes investors and fiscal and monetary policymakers — treats the world’s largest investment banks as weathervanes for the wider global economy. This is because these banks are central to nearly all aspects of the economy, given their role in arranging M&A deals, underwriting bond and other debt capital markets transactions, coordinating and underwriting IPOs and other equity issuances, lending substantial sums of money, and investing their own money into public and private ventures.

To the extent that certain investment banks are seeing downturns in their aggregate revenue figures, this suggests a slowdown in most markets compared to previous periods. In turn, this might portend a sustained global economic slowdown.

However, on the whole, the performance of the investment banks is not as bleak as some commentators had predicted in previous weeks. This suggests that perhaps the state of the global economy remains uneven, with some regions and markets more disproportionately affected than others. In turn, this implies a different state of affairs than those during the 2007-08 Global Financial Crisis, which was largely owed to a systematic collapse of the banking sector due to regulatory and risk management failures.

From an interview perspective, your appreciation for the role that investment banks play in the global economy by referencing this development will accordingly demonstrate to interviewers that you appreciate the “big picture”. You can supplement this big-picture understanding with reference to the specific performance of some of the investment banks. You may find it helpful to review their most recent quarterly reports (links to three of which are above) to see how they break down their performance figures across different segments such as market-making, investment banking, and commissions and fees.

How is this topic relevant to law firms?

Many activities undertaken by investment banks are similar to those provided by law firms in the sense that they are professional advisory functions. It is therefore no surprise that law firms have also seen a slowdown in fees.