How Market Volatility Disrupted Investment Banking IPO Activity

Markets had a volatile start to 2022. The S&P500 is down 6% since the start of the year.

Investor concerns about inflation and rising interest rates caused market volatility. Then Russia invaded Ukraine on February 24, only adding more uncertainty to the picture. As a result, companies seeking to go public through initial public offerings (IPOs) have plummeted.

This drastic decline in IPO activity is evidenced by the fortunes of JPMorgan Chase (JPM -2.87% ), Goldman Sachs (GS -4.35% )and Morgan Stanley ( MRS -4.69% )all of whom have seen their investment banking income fall off a cliff.

Image source: Getty Images.

Big banks have seen investment banking revenues plummet

JPMorgan Chase reported investment banking revenue of $2.1 billion in the first quarter, down 28% from a year ago, as investment banking fees fell 31%. The company cited lower stock and debt underwriting fees.

Goldman Sachs shared in the pain, with investment banking revenue down 36% from a year ago and the fourth quarter. Equity underwriting was the hardest hit, with these fees down 83% from a year ago.

Finally, Morgan Stanley was also hit, as investment banking revenue fell 37% from a year ago. The main driver of Morgan Stanley’s decline was also equity underwriting revenue, down nearly 83% from a year ago.

A graph shows investment banking revenues for JPMorgan Chase, Morgan Stanley and Goldman Sachs over the past two years.

Data source: quarterly declarations. Table by author.

IPO activity plummeted after a scorching 2021

The driver of lower investment banking revenue was primarily lower equity underwriting revenue – or revenue from IPO activity. According to Renaissance Capital, IPO activity was at its lowest level in six years.

Falling stock prices and the Russian-Ukrainian war were a source of concern for equity issuers, who decided to delay the IPO to the first quarter. There were 18 IPOs in the first quarter, a drastic drop from 101 in the first quarter of last year and 84 in the fourth quarter.

A graph shows the number of IPOs from 2012 to 2022.

Data source: Renaissance Capital. *Data through April 20, 2022. Graph by author.

IPOs are poised to rebound

Goldman Sachs chief financial officer Denis Coleman said “the investment banking order book remains strong.” Goldman CEO David Solomon said engagement from banking customers is high, but “a bunch of equity issues that were supposed to take place in the quarter got pushed back” as market volatility persisted. No one expected a repeat of 2021, which saw record levels of activity, but Solomon said the first quarter was well below the normalized trend.

Renaissance said: “The short-term outlook for the IPO market is hazy heading into the second quarter, although one thing is clear: recent IPO returns and risk appetite will need to rebound. before activity resumes. Renaissance also noted that several private companies are still considering IPOs – with 132 companies in the pipeline.

Goldman Sachs, which is the most reliant of the three on investment banking, saw its total revenue fall 27%. Even though it trades at a measly 6.3 price-to-earnings (P/E) ratio, I’m avoiding the stock until equity issuance begins to pick up. JPMorgan Chase and Morgan Stanley, on the other hand, saw their revenues decline by only 5% and 6% thanks to their various sources of income. With P/E ratios of 9.5 and 10.9, they look like solid value stocks to buy on the downside.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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