First half good, second half bad?

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Most banks have had an excellent start to the year. But profits (and therefore bonuses) over the next six months could turn out more sketchy.

"The asset quality at brokerages is deteriorating," says Dick Bove, an analyst at Punk Ziegel in the US, who last week downgraded Merrill Lynch, Bear Stearns, Lehman Brothers, Morgan Stanley and Goldman Sachs from 'market performs' to 'sells'. "Loan losses are deteriorating and if the securities these firms hold are valued in the marketplace, they will find they're worth substantially less than they are on the balance sheet for."

Banks' stocks fell between 1% and 4% last week when Bove's downgrades were announced. He tells us earnings will suffer in the next six months and people working in the industry will be paid less for the whole year: "Brokerages will do less investment banking and their trading activity will slow... no one will escape."

But rival analyst and former Lehman Brothers CFO Brad Hintz at Sanford Bernstein thinks there might just be some respite for M&A bankers: "Financial sponsor activity is beginning to slow, but probably not enough to affect this year's bonuses. We're more likely to see the impact in 2008."

Global M&A activity rose 55% in the first half of this year, according to data provider Dealogic. Financial News reports that fees on the ABN AMRO deal alone are likely to exceed €1bn (US$1.3bn).

Recently announced results, first half round-up

Bank of America

Net income up 5% thanks to strong capital markets, M&A advisory, wealth management and principal investments. Rising credit losses.


Net revenue up 32% for the investment bank in the first half of 2007, net income up 61% in the same period. Strong growth in investment banking fees (M&A advisory, equity underwriting, debt underwriting) and the equity and fixed income markets business, but provisions for credit losses are rising fast.


Revenues in the markets and banking division up 27.6% in the first half, net income up 49.3%. Strong growth in fixed income, equity markets and equity underwriting and M&A advisory. Credit costs doubled.

Merrill Lynch

Global markets and investment banking net revenues up 38% in the first half of 2007 vs. the first half of 2006; pre-tax earnings in the division up 45% over the same period. Strong growth in fixed income, currencies and commodities - including trading credit products - and in equity capital markets, debt capital markets and M&A advisory.