European Pressphoto Agency

Europe’s biggest banks reported higher profits for the third quarter, driven mainly by improved profits at their investment banking arms. Several have also announced a new round of cost-cutting and job losses at those arms. So what’s going on?

Matthew Attwood, investment banking editor at our sister publication Financial News, took a look.

Q. Why are Europe’s banks making money in investment banking again?

A. The European Central Bank’s bond buying program has, since August, supported sovereign debt markets and raised hopes that politicians will now find a solution to Europe’s sovereign debt crisis. The confidence boost it gave meant borrowers and investors returned to the bond markets.

This year the third quarter – typically the lowest-volume period in the new issuance market – saw 70% more corporate bond issuance than the second quarter, set against a 54% decline in 2011. The banks have been riding the wave ever since, winning income by acting as structuring advisors and distributors on those new deals.

Tomas Lundquist, head of European corporate debt capital markets at Citigroup, said:

“Companies are taking the opportunity to fund while conditions are good: they don’t necessarily have funding needs right now but are issuing because they know they will have needs in the future.”

The banks that arrange new issues also try to ensure that they are oversubscribed, meaning that a number of investors attempt to top up their allocation of new bonds by buying in the so-called secondary market and banks involved in fixed income trading are paid a second time. The banks derive a commission fee from arranging trades between buyers and sellers. Some banks also use their own capital to run bond inventories, and they stand to make a gain should the price of bonds they sell to investors increase in the time since the banks bought them.

Q. Can this be sustained?

A. Debt specialists at the banks admit that if corporate issuers are satisfied with their funding levels from this period of activity, meaning new issuance slows, investment banking revenues could fall back.
[{"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD451_2saudi_C_20181014080314.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD451_2saudi_C_20181014080314.jpg", "formatted_filename": "S BD saudi C", "alt_text": "Trump, Saudis Escalate Threats Over Disappearance of Saudi Journalist"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD475_BRUNSO_C_20181014152539.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD475_BRUNSO_C_20181014152539.jpg", "formatted_filename": "S BD BRUNSO C", "alt_text": "Trump Promotes Pastor\u2019s Release on the Campaign Trail"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/B3-CA913_brexit_C_20181014165519.jpg", "src": "https://s.wsj.net/public/resources/images/B3-CA913_brexit_C_20181014165519.jpg", "formatted_filename": "B CA brexit C", "alt_text": "Brexit Talks Stall Ahead of Key Summit"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD461_bavari_C_20181014122435.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD461_bavari_C_20181014122435.jpg", "formatted_filename": "S BD bavari C", "alt_text": "Merkel\u2019s Allies Hit With Worst Election Showing Since 1950"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD505_1015ch_C_20181015021727.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD505_1015ch_C_20181015021727.jpg", "formatted_filename": "S BD ch C", "alt_text": "IMF Shows Risks in China\u2019s Debt Markets as Global Popularity Booms"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/B3-CA552_uschin_C_20181011181150.jpg", "src": "https://s.wsj.net/public/resources/images/B3-CA552_uschin_C_20181011181150.jpg", "formatted_filename": "B CA uschin C", "alt_text": "U.S., China Edge Closer to a Cold War"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD459_RUSUPS_C_20181014120950.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD459_RUSUPS_C_20181014120950.jpg", "formatted_filename": "S BD RUSUPS C", "alt_text": "In Regional Votes and Polls, Russians Voice Their Discontent"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD401_mahath_C_20181012192853.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD401_mahath_C_20181012192853.jpg", "formatted_filename": "S BD mahath C", "alt_text": "Welcome Back, Mr. Prime Minister, Sorry About the View Out Your Window"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD116_GUATEM_C_20181011153338.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD116_GUATEM_C_20181011153338.jpg", "formatted_filename": "S BD GUATEM C", "alt_text": "As Migration From Guatemala Surges, U.S. Officials Seek Answers"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/S1-BD447_romero_C_20181014053018.jpg", "src": "https://s.wsj.net/public/resources/images/S1-BD447_romero_C_20181014053018.jpg", "formatted_filename": "S BD romero C", "alt_text": "Pope Grants Sainthood to El Salvador\u2019s Martyred Archbishop"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "https://s.wsj.net/public/resources/images/B3-CA511_TIMOR__C_20181011170606.jpg", "src": "https://s.wsj.net/public/resources/images/B3-CA511_TIMOR__C_20181011170606.jpg", "formatted_filename": "B CA TIMOR C", "alt_text": "Power Play: Tiny East Timor Bets Big on Oil and Gas"}, null, {"document_url": "https://blogs.wsj.com/source/2012/11/16/investment-banking-bounces-back-but-how/", "unformatted_src": "http://s.wsj.net/public/resources/images/OB-VJ683_bankin_D_20121116080523.jpg", "src": "http://s.wsj.net/public/resources/images/OB-VJ683_bankin_D_20121116080523.jpg", "formatted_filename": "OB VJ bankin D", "rendered_width": 262, "rendered_height": 174}, null]