(Bloomberg) --Equity capital markets bankers are looking at another disappointing bonus season thanks to this year's slower-than-expected deal flow.
Combined fees for the ECM underwriting businesses at Wall Street's top five banks rose 14% for the first nine months of the year, to $3.5 billion from roughly $3.1 billion a year earlier.
"Most people were expecting a rebound, and that's been disappointing," Bloomberg Intelligence senior analyst Alison Williams said.
At the start of the year, expectations for eight top investment banks — including the UK's Barclays Plc and Germany's Deutsche Bank — pointed to equity underwriting fees growing 52% this year. That projection has been tempered as banks missed Wall Street's estimates, with the current consensus calling for a 21% increase instead, Williams said.
None of this bodes well for bonuses. Junior bankers "in the past may have anticipated 100% of their base salary in bonus," said Brianne Sterling, senior vice president at executive search firm Selby Jennings. "They might now be looking more at 60% to 70%, depending on the bank."
That said, bonuses for directors and managing directors at large banks are less predictable because "there isn't always a transparent formula," she said.
Goldman Sachs Group Inc. led the pack in equity underwriting for the first nine months of the year, with revenue of $901 million, up from $633 million a year ago. JPMorgan Chase & Co., last year's league tables winner, followed with $827 million. Bank of America Corp. and Morgan Stanley came in third and fourth. Citigroup Inc. placed fifth and was the only one to post a decline, falling almost 13% to $403 million.
And there isn't much hope on the horizon, BI's Williams said, as the fourth quarter looks like it will be "a little bit weaker" than the first three.
Underwriting Revenue
The main issue challenging deals is the stock market decline that started over the summer, with the S&P 500 falling more than 9% since its July 31 high. Despite marquee initial public offerings like Arm Holdings Plc's $5.2 billion listing and Instacart's $660 million IPO, conditions aren't conducive to pricing new listings or follow-on offerings.
Equity capital markets deal flow remains tepid, hovering around $101 billion this year. That's an improvement over the $92.6 billion for all of last year, but still far below the $200 billion average in 2018 and 2019.
To address the slowdown, some major banks have already implemented rounds of job cuts. Wall Street firms will determine this year's bonuses between December and February.
With top investment banks under heavy scrutiny from shareholders and regulatory authorities, some senior bankers have decided to join second-tier investment banks, lured by guaranteed compensation packages for the next year or two.
Evercore Inc. — known for its advisory business — hired a group of media and telecommunications bankers from Credit Suisse Group AG a few months ago. Wells Fargo also hired Credit Suisse executive Jill Ford and Citigroup veteran Clayton Hale as co-head of equity capital markets.
European firms are also poaching from the major banks. In May, Banco Santander SA hired a group of eight Credit Suisse senior bankers, including its former M&A chief Steve Geller.
"I don't think ECM hiring will be as aggressive" going forward, Selby Jennings's Sterling said. "What we've seen this year is probably more senior movement, so making sure they have the right leadership at the helm and then from there allowing that person to further build out the ranks if necessary."
