LONDON/NEW YORK Global investment banks' fee income dropped by about 25 percent in the second quarter, reaching its lowest level since early 2009 as the widening euro zone crisis weighed on securities underwriting and merger activity, Thomson Reuters data show.
The fees totaled nearly $14 billion in the second quarter, down from more than $18 billion in the first quarter of 2012. Year to date, fees have totaled $32 billion, down 25 percent from the same period in 2011.
Though the pain has been widespread, dealmaking in Europe has been particularly tough, with new listings in the region almost stalling completely.
"Early signs were good, but while the U.S. market has remained robust, sentiment in Europe has given way to worries over the world economy and the euro zone," said Viswas Raghavan, global head of equity capital markets at JPMorgan.
Weaker fee income is likely to hurt second quarter income for major investment banks. But the pain will be felt elsewhere, too. For example, bond and stock trading revenues, usually investment banks' cash cows, could fall 12 percent from an already difficult second quarter last year, analysts at Morgan Stanley said.
Trading revenues could be down close to 40 percent compared with the first quarter, when European Central Bank cheap money injections boosted trading, helping earnings for top players like Goldman Sachs Group Inc, Morgan Stanley, Barclays PLC and Deutsche Bank AG.
Few bankers are predicting that this situation will change any time soon, and the gloomy backdrop will have immediate and also longer term implications for top firms.
Jon Peace, banking analyst at Nomura, said he had pretty much halved second quarter earnings estimates for the players almost entirely dependent on trading and investment banking, like Goldman, after a very weak month for activity in May.
Citigroup analyst Keith Horowitz also cut estimates for big investment banks through 2014.
"The second quarter of 2012 was a repeat of the sovereign 'episodes' previously witnessed, notably in the second quarter of 2010 and third quarter of 2011," Horowitz wrote in a report on Wednesday.
JPMorgan Chase & Co is set to kick off the earnings season for the biggest banks on July 13, followed by Citigroup Inc on July 16, Goldman on July 17 and Bank of America on July 18. Morgan Stanley has not yet announced its earnings date.
Analysts' second-quarter estimates for those five U.S. banks have dropped 14 percent over the past 30 days, while estimates for full-year 2012 are down 5 percent, according to Thomson Reuters I/B/E/S. Estimates for 2013 and 2014 are down 3 percent and 2 percent, respectively, from a month ago.
"IT'S GOING TO BE LOUSY"
Investment banks are also likely to pull the trigger on more job cuts as the second quarter pain feeds through, with many already weeding out senior - and expensive - managers as they try to keep pay costs under control.
Virtually all top investment banks had been trimming staff in May and June, headhunters said.
Goldman has cut dozens of jobs across its operation this month, including cuts that occurred on Thursday across its operations in the U.S. [ID:nL2E8HSHXD]
Switzerland's Credit Suisse is poised to cut 30 percent of senior investment banking department staff as part of thousands of layoffs.
Equities divisions, hurt by low secondary trading volumes and thin commissions, were also particularly badly hit across the banks.
Since the middle of last year, major investment banks have cut well over 130,000 jobs, according to a Reuters tally.
While some of the layoffs are in response to market fluctuations, regulation is also bringing about a more fundamental reshaping of the industry - effectively shrinking it as businesses become costlier to run.
Profits from retail divisions and wealth management arms will help cushion the blow to headline numbers for some universal banks, though investment bank units tend to be closely watched as the big earnings-drivers.
Accounting oddities, whereby banks can make paper gains from the price of their debt worsening, will also feature heavily in second quarter earnings, analysts said, distorting the overall picture and helping some stay in the black.
But underlying revenues in investment banks will suffer and give banks little comfort for the months ahead, with euro zone worries still circling Greece and Spain and the traditionally slow summer months unlikely to provide a surge in activity.
"It's going to be lousy," said one investment bank top executive, speaking on condition of anonymity and referring to second quarter results.
(Additional reporting by Kylie Maclellan in London; Editing by Bernard Orr)
(This story has been refiled to change date and fix Credit Suisse code)