The COVID-19 pandemic has been an interesting time for investment banks. Increased market volatility has translated into higher trading volumes and more deals, while helping companies take on debt and go public.

Investors expected this level of activity to decline each time the world came back to life after the pandemic.

But Russia’s invasion of Ukraine, supply chain issues, high inflation, the Federal Reserve’s plans to raise interest rates to get that inflation under control (as well as shrinking its balance sheet massive) and rising bond yields have combined to heighten volatility over the past six years. month. This volatility has been good for some investment banking businesses, but a headwind for others. This has created an interesting – almost contradictory – situation for investment banks. Nowhere can this be seen better than at Goldman Sachs (GS 3.25%).

More trading volume…

Goldman’s two largest business divisions are Investment Banking, which handles mergers and acquisitions (M&A) advisory services and equity and fixed-income underwriting, and then Global Markets, which understand sales and trading. Both companies meet a wide variety of needs for institutional and corporate clients.

Image source: Goldman Sachs.

In the first quarter, Goldman Sachs’ fixed income, foreign exchange and commodities (FICC) trading revenue jumped 21% from an incredibly strong Q1 2021 and was up approximately 154% from Q4 2021. Chief Financial Officer Denis Coleman attributed the impressive results to strong activity in the bank’s interest rate, currency and commodity products.

“Our diverse and global footprint, combined with our intermediation and risk execution capabilities, is a key differentiator,” Coleman said.

In equity trading, revenue declined from a very strong first quarter of 2021, but also increased significantly from the fourth quarter, largely due to clients’ need to build up their cash positions in an uncertain environment.

… but fewer companies are going public

It was a completely different story at Goldman Sachs’ investment banking division, with revenue down in the quarter.

Goldman Sachs investment bank collapses.

Image source: Getty Images.

M&A advisory revenue was strong; the company closed 115 deals during the quarter worth $385 billion in deal volume. But these closed deals were originally announced last year. Very few new deals were announced during the quarter, although, according to Coleman, the new deal pipeline is “strong”. Yet many companies are postponing them, waiting for more stability in the economy and markets.

Debt underwriting activity was also down, both quarter-over-quarter and year-over-year, primarily due to lower activity in bond finance products. leveraged and asset-backed. But the biggest reason for lower investment banking revenue was a huge drop in IPOs and special purpose acquisition company mergers, which nearly came to a halt in the first quarter. Equity underwriting revenue fell 83% year-over-year.

Two people are studying graphs on a large screen.

Image source: Getty Images.

Things could improve later this year

The contrast between the huge downturn in investment banking activity this quarter and the surge in trading has truly created a two-way investment banking story for Goldman Sachs and the rest of the industry. I think there are a lot of companies that still want to do business or go public. But the combination of market volatility and general investor skepticism about growth stock valuations has created an unattractive environment. If things stabilize, there could be an upturn in activity later this year.

Additionally, as the Fed continues to raise benchmark interest rates, bond yields continue to remain elevated and rebound, and the Fed begins to shrink its balance sheet (which could impact yields longer-term fixed income), volatility should continue to prevail, which could create a nice backdrop for trading earnings. So while investment banking and trading revenue is difficult to predict, and the lack of deals and IPOs could impact investment banking revenue in the coming quarters , my outlook is not completely pessimistic at the moment.