After an Explosive Year, What Does 2022 Have in Store for Investment Banks?

Investment banking has been blistering hot this year. Deal activity skyrocketed, and investment banks generated record fees.

According to S&P Global Market Intelligence, merger and acquisition (M&A) activity has generated $3 trillion in deal value globally across over 35,000 deals. According to Refinitiv, the value of U.S. deals through November totaled $2.3 trillion, the highest ever recorded.  

Investment banks have enjoyed favorable conditions, and as a result, their revenue from these activities exploded higher in 2021. After such a strong year, what could 2022 possibly have in store for investment banks?

2021 was a year for the record books

Deals have been at an all-time high this year for a couple of reasons. Analysts say that ongoing support for markets through the Federal Reserve's quantitative easing and near-zero interest rates helped spur more deals due to lower borrowing costs. Also, private equity firms have been sitting on vast amounts of dry powder (cash reserves) for years now that they are finally putting to work.

Image source: Getty Images.

Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Citigroup were the top performers when it came to investment banking, with over 1,000 deals between the four of them. Their revenues grew at an impressive rate as well:

Sources: FactSet, company 10-K filings.

Here's what 2022 has in store

According to Alan Felder, managing director of UBS's OneBank Partnership, activity looks like it could remain elevated into next year. Felder cites ongoing low interest rates and dry powder -- cash available to spend on deals -- at record levels as drivers for strong M&A markets. Despite the frenetic pace of deal-making in the first half of the year, private equity firms are sitting on $3.3 trillion in dry powder as of June 30.   

According to research by the law firm Dykema Gossett PLLC, M&A markets will remain at their torrid pace in 2022. According to the law firm's survey of 266 M&A professionals: "The jury is in: In the year to come, it looks like nothing -- not the latest surge in COVID-19 cases, the Biden administration's legislative agenda, or economic uncertainties -- will be able to break the stride of M&A deal-makers."

During Goldman Sachs' third-quarter earnings call, it said its backlog of deals -- or estimated revenues from future transactions -- was lower than the second quarter but still high compared to last year. However, the firm is paying attention to monetary policy, specifically changes to interest rates. While gradual interest rate increases shouldn't impact M&A activity, rapidly rising interest rates could discourage M&A activity until inflationary conditions subside. 

Image source: Getty Images.

What should you do?

Investment banking will remain hot into 2022, but growth may not keep up with 2021. After all, there are some headwinds to the economy, notably inflationary pressures, which could impact the number of deals made during the year.

You can take advantage of this environment by investing in companies that benefit from increased activity but don't rely too heavily on investment banking as a primary source of revenue. I like Morgan Stanley because of its diverse sources of earnings.

In volatile markets, the firm makes money on increased trading activity through transaction revenue from E*TRADE. It also makes money managing other people's money through its wealth management segment, which was boosted by its Eaton Vance acquisition completed earlier this year. Morgan Stanley is a big beneficiary of active deal-making but also has the tools to perform well in other market environments.