The early stages of a long-awaited recovery in investment banking fees is set to boost Wall Street lenders when they report second-quarter earnings starting this week, with mergers and debt deals picking back up after a lacklustre two years.
Analysts expect investment banking revenues at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup will on average rise more than 30 per cent from a year earlier during the second quarter, according to estimates compiled by Bloomberg.
“You’re beginning to see a nice rebound in investment banking activity,” said Oppenheimer analyst Chris Kotowski.
JPMorgan, Citi and Wells Fargo report results on July 12. Goldman publishes earnings on July 15, followed by Morgan Stanley and BofA a day later. Overall, rising defaults are expected to contribute to muted earnings growth for many of the largest US lenders this quarter.
The resurgence of dealmaking, though, could be a bright spot. Analysts predict the bottom lines of Goldman and Morgan Stanley, whose businesses have the biggest exposure to investment banking, will benefit the most. Large deals that closed in the second quarter included ExxonMobil’s $60bn acquisition of Pioneer Natural Resources in May, which was brokered by Citigroup, Goldman and Morgan Stanley, and Aon’s $13bn purchase of insurance broker NFP in April, which was guided by Citi and BofA, among others.
In what has been a brutal reminder of the industry’s feast-to-famine swings, investment banking revenues fell last year from record highs in 2021 to their lowest level in years. Rising interest rates by central banks around the world have damped activity for M&A and new stock market listings.
Wall Street bosses have been talking up a recovery for more than a year — the heads of Goldman Sachs and Morgan Stanley spoke about the “green shoots” of a recovery as far back as 12 months ago — but the business has taken longer to rebound than initially expected.
In a jolt of optimism, JPMorgan told investors last month that the increase in revenues from investment banking during the second quarter was set to rise by as much as 30 per cent, double what the bank had initially anticipated.
Smaller rival Jefferies last week reported that investment banking revenues in the three months to the end of May rose almost 60 per cent from a year earlier. Its top management said it was “increasingly optimistic” about the second half of 2024 and 2025.
The rebound has been aided by debt offerings, as confidence in the economy has made investors more willing to jump into riskier deals. In one of the biggest deals of the quarter, struggling fitness company Peloton refinanced $1.35bn in debt in May in a deal that was led by JPMorgan and Goldman.
Bankers are not anticipating a return to investment banking activity levels seen in 2021 and 2022 when rock-bottom interest rates and government stimulus during the coronavirus pandemic led to a surge in M&A and IPOs.
Bankers have pointed to a need for private equity firms to exit existing investments and deploy trillions of dollars in dry powder, as well as corporations reviewing their supply chains and coping with rapid advancements in technology such as artificial intelligence.
“We have capital markets activity still running below the normal trend line and it is in the process of ramping up,” said Betsy Graseck, a banking analyst at Morgan Stanley. “That tailwind, we think, will show up in the quarter and persist through the rest of this calendar year and into 2025.”
Investors have also been fretting that persistently higher interest rates could lead to more borrowers defaulting on their loans, with credit losses in recent years coming off of historically very low levels.
Analysts expect JPMorgan, BofA, Citi and Wells, the four largest US banks by deposits, to report more than $7bn in the second quarter of so-called charge-offs, which are losses on loans marked as unrecoverable. This would be up more than 50 per cent from a year earlier.
“We’re still in a phase where I would characterise things as normalising rather than deteriorating more visibly,” said Scott Siefers, banking analyst at Piper Sandler. “Virtually every bank investor on the planet is just acutely focused on commercial real estate in particular.”
:max_bytes(150000):strip_icc()/roundup-writereditor-loved-deals-tout-f5de51f85de145b2b1eb99cdb7b6cb84.jpg "I’m a Travel Writer, and Out of the 5 Million Prime Day Deals on Site, These Are the 12 I’m Shopping")
