Markets have gotten off to a volatile start in 2022. The S&P 500 is down 6% year to date.
Investor concerns about inflation and rising interest rates have caused volatility in markets. Then Russia invaded Ukraine on Feb. 24, only adding more uncertainty to the picture. As a result, companies looking to go public through initial public offerings (IPO) have plummeted.
This drastic drop in IPO activity is evidenced in the fortunes of JPMorgan Chase (JPM 0.07%), Goldman Sachs (GS -1.34%), and Morgan Stanley (MS -1.88%), which have all seen their investment banking revenues fall off a cliff.
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Major banks saw revenues from investment banking plummet
JPMorgan Chase saw investment banking revenue of $2.1 billion in the first quarter -- down 28% from last year, as investment banking fees dropped 31%. The company cited lower equity and debt underwriting fees.
Goldman Sachs shared the pain, as investment banking revenue was down 36% from last year and the fourth quarter. The biggest hit was equity underwriting, with these fees down 83% from last year.
Finally, Morgan Stanley also felt the hit, as investment banking revenue dropped 37% from last year. Morgan Stanley's primary driver of the drop was also equity underwriting revenue, which was down nearly 83% from last year.
Data source: Quarterly filings. Chart by author.
IPO activity dropped off after a blistering-hot 2021
The driver of lower investment banking revenue was primarily lower equity underwriting revenue -- or revenue from IPO activity. According to Renaissance Capital, initial public offering activity was at its lowest level in six years.
Falling stock prices and the Russia-Ukraine war has been a cause for concern for equity issuers, who have decided to delay going public in the first quarter. There were 18 IPOs in the first quarter, a drastic drop-off from 101 during the first quarter last year and 84 in the fourth quarter.
Data source: Renaissance Capital. *Data through April 20, 2022. Chart by author.
IPOs are poised to bounce back
Goldman Sachs Chief Financial Officer Denis Coleman says that the "investment banking backlog remains robust." Goldman Chief Executive Officer David Solomon says that engagement from banking clients is high, but "a bunch of equity issuance that was supposed to happen in the quarter got pushed out" as market volatility persisted. Nobody expected a repeat of 2021, which saw record activity levels, but Solomon said that the first quarter was far below the normalized trend.
Renaissance said, "The near-term outlook for the IPO market is foggy heading into the second quarter, though 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 eyeing IPOs -- with 132 companies in the pipeline.
Goldman Sachs, which is the most reliant of the three on investment banking, saw total revenue fall 27%. Even though it trades at a meager price-to-earnings ratio (P/E) of 6.3, I'm avoiding the stock until equity issuances start picking back up. JPMorgan Chase and Morgan Stanley, on the other hand, saw revenue fall just 5% and 6% thanks to their diverse revenue streams. With P/E ratios of 9.5 and 10.9, they look like solid value stocks to buy on the dip.
