With the world stock markets on the up, the Dow rising 32% since March, and firms posting relatively strong profits, the feel-good factor does seem to be back. M&A appears to be waking from its slumbers and the IPO market shows signs of recovery. Heck, firms have even started to recruit again. But, let's not get too carried away. Much of the good performance this year has been down to the bond market, and it is generally recognised that the easy pickings from fixed income activities are over for a while. A new report warns that investment banks may struggle to increase profits in 2004.
A new study by consultant Mercer Oliver Wyman and Lazard is predicting that net revenues from wholesale banking activity will increase by just 2% next year. Mercer's Imran Gulamhuseinwala is reported as saying: 'What we are trying to show is that banks will have to run to stand still. The year ahead is hugely dependent on equities coming back'.
The report points out that, although investment banking earnings have grown by an average of 39% this year, most of this is down to the impact of cost reductions and lower provisions for bad debts. Very little of the increase in profits is down to increased business activity. Revenues have mostly been flat this year.
Now, fixed income revenues are expected to fall by 15% in 2004. Revenues from equities and M&A are thought to rise by 38%. But the maths remain disappointing and the projected effect on net revenues is the modest 2% increase mentioned.
So, although we can say with some certainty that the bad times are over, it would be wrong to expect firms to really push the boat out in 2004. Costs containment will remain key and bonus increases probably modest next year.