Investment banking in turmoil.

(From Financial Director)

Byline: Jules Stewart, a freelance journalist.

In today's markets, the investment banker's misery is the corporate banker's delight. Up to a point, that is. There's no arguing with the reality that M&A activity has plummeted by half this year, and, try as they may to talk up the market, people in corporate finance departments are spending a lot of time staring at the wall.

But Teather & Greenwood's banking analyst Martin Cross argues that business at the investment banks has by no means come to a halt. "Investment banks are getting work in IPOs and equity raising as companies de-gear and restructure their balance sheets, he says. "But they are lumbered with a high cost-to-income ratio, so their capacity for weathering a downturn is limited."

The investment banking crisis also highlights an interesting side question, concerning whether the integrated houses, such as Schroder Salomon Smith Barney and JP Morgan Chase, that have been put together in the past few years, can live happily under one roof. The conflicts between the amalgamated risk-prone investment bank and risk-adverse retail and corporate banks have been make starker in recent months. It has become unsustainable for investment bank analysts to remain bullish. They have had to acknowledge that many corporates under their coverage are in deep trouble, and this drags down business for the entire group. Clients are no longer prepared to tolerate equity research put out on false pretences.

Companies are finding it expensive to raise debt through the markets, with the appetite for corporate paper having all but dried up. A shrinking universe of investors means that corporate issuers have to price their paper accordingly to attract buyers.

Also, as Trevor Pitman, group MD at Fitch Ratings, points out, investor confidence has taken a nosedive in the past year: "It's been particularly difficult since the second half of the year," he says. "There were moments when it looked like the market was picking up, but it was a false dawn." This has been reflected in the postponement of some high-profile issuance, such as a EUR1.5bn bond by Hong Kong's Hutchinson Whampoa.