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Dealmaking continues to lag in Q2


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Dealmaking continues to lag in Q2

Dealmaking activity at the start of the second quarter isnot much better than it was throughout the first quarter, despite markets beingmore stable.

The global investment banking disclosed fee pool in April totaled$4.3 billion, down 24% from March and down 33% from year-ago levels, CreditSuisse Securities (USA) LLC analysts said in a May 2 report. Through April,disclosed global investment banking fees in the second quarter are trackingdown 14% quarter over quarter and 39% year over year, according to the report.Still, the Credit Suisse analysts said the market stabilization that started inMarch continued in April, which helped to create flat-to-higher asset prices insuch areas as equities and high-yield debt.

"While this isn't yet great for business, we'll view itas a starting point post the challenges of January and February," theanalysts said.

So far in the second quarter, new issuance has been thehighlight for the investment banking world. April saw an increase in IPOactivity, helping to boost disclosed equity underwriting fees. Those fees, inthe second quarter, are tracking up 14% sequentially, but are still down 52%year over year, according to the report.

Disclosed debt underwriting and loan syndication fees aretracking 22% lower quarter over quarter and 39% lower year over year, whiledisclosed M&A fees are tracking 15% lower quarter over quarter and 25%lower year over year, the Credit Suisse analysts said. Second-quarter globalannounced M&A volume is tracking down 43% year over year and 9% quarterover quarter, according to the report.

U.S. M&A volumes were looking especially weak in thesecond quarter until three large April 28 announcements, Abbott Laboratories'$30.2 billion deal for St. Jude Medical Inc., AbbVie Inc.'s $9.8 billion dealfor Stemcentrx Inc. and Sanofi's approximately $8.6 billion deal for MedivationInc. Those transactions helped push April's total announced volume of U.S.M&A deals up to $117.58 billion, according to a May 2 report from S&PGlobal Market Intelligence Senior Director Richard Peterson.

Before April 28, the month was on pace to produce the lowesttotal deal value for a month in three years, Peterson said in an interview."Generally speaking, we got off to a slow second quarter," Petersonsaid.

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A weak deal environment does not bode well for investmentbanking revenue. A lack of deal volume in the first quarter negatively impactedinvestment banking revenue totals at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and , executives from thecompanies said.

The combined investment banking revenue from those companieswas down 23.3% year over year in the first quarter. Much of the drop came fromequity underwriting revenue, which was down 53.0% year over year for the fivei-banks.

During first-quarter earnings conference calls, executivesfrom the companies said first-quarter market volatility slowed dealmakingactivity. However, they were cautiously optimistic that market stability wouldlead to increased deal volume.

The equity markets did see some stability during April. TheS&P 500 Index, which in February was down more than 10% in 2016, was upabout 1% on the year at the close of the last trading day in April. Still, someexecutives, such as Goldman Sachs CFO Harvey Schwartz, said client activitycould lag a marketrecovery because the first quarter saw such a high amount of volatility. BofAChairman, President and CEO Brian Moynihan also said it could take time beforedealmaking normalizes.

"There are still a few more weeks of stability that youhave to see for people to actually pull the trigger on financings andstuff," he said, according to a transcript of the company's April 14 earnings conferencecall.

When companies are more comfortable with the environment,pent-up demand could boost activity, said BofA CFO Paul Donofrio. "Thereis going to be … financing activity at some point because clients need tofinance," he said.

JPMorgan CFO Marianne Lake was a bit more optimistic aboutunderwriting bouncing back than M&A advisory business. "We expect asequential decline in M&A to be more than offset by an increase in debt andequity underwriting, if the recent market improvements continue," Lakesaid according to a transcript of an April 13 earnings conference call.

Morningstar Inc. analyst Michael Wong said it was reasonablethat executives were constructive in their commentary, and he could see ascenario where underwriting revenue accelerated.

"The market has bounced back and the economic outlookis a little bit more stable," Wong said. "As long as you get that,the underwriting volume can come back quickly, just like it can fall quickly."