The big banks on Wall Street, often touted as the barometer of economic trends, have delivered a sobering message to investors banking on a third-quarter upswing in deal-making profits: the real surge might not materialize until 2024.
During this period, five major banks with substantial operations on Wall Street collectively registered a 2% dip in investment banking fees compared to the corresponding period last year, dispelling the optimistic chatter surrounding mergers, acquisitions, and initial public offerings (IPOs) last summer. They now caution that sustained gains are likely to be delayed.
Morgan Stanley (MS) bore the brunt of this decline, experiencing a 27% plummet in investment banking revenue, prompting a nearly 7% drop in the bank’s stock—a performance not seen in over three years.
Goldman Sachs (GS) saw its revenues remain relatively steady, while JPMorgan (JPM) reported a decline. Citigroup (C) and Bank of America (BAC) were the sole institutions reporting year-over-year increases.
James Gorman, CEO of Morgan Stanley, informed analysts that his firm is witnessing an upswing in M&A and underwriting activity, but anticipates that “most of the activity to materialize in 2024.” He candidly acknowledged the dry spell, expressing amusement at an analyst’s quip, stating, “for all the talk about green shoots, someone forgot to water them.”
Even the banks in the green zone refrained from exuding excessive enthusiasm. Alastair Borthwick, CFO of Bank of America, admitted, “we’ve grown tired of predicting” when investment banking will return to more typical levels of activity. He added, “We haven’t yet seen that confidence return to the equity capital markets.”
Citigroup’s CEO, Jane Fraser, echoed similar sentiments, remarking that predicting a sustainable rebound in deal activity remains challenging. She observed, “I’m struck how consistently CEOs are less optimistic about 2024 than a few months ago.”
The third quarter was anticipated as the turning point in Wall Street’s dry spell, propelled by a slew of public offerings expected to break the IPO logjam. While some companies did successfully debut last month—including ARM, Instacart, Klayvio, and Birkenstock—some faced price drops after their market entries.
This mixed performance ignited doubts regarding the willingness of other potential IPO candidates. These concerns heightened toward the end of the month amidst escalated borrowing costs, apprehensions about extended periods of high interest rates, geopolitical tensions, and fresh anxieties over a looming recession.
Goldman Sachs, the principal banker for numerous September IPOs, disclosed a decrease in their backlog of future deals during the quarter. JPMorgan’s CFO, Jeremy Barnum, noted, “The current levels in investment banking remain quite depressed,” compared to 2019, which is regarded as the last ‘normal’ year.
In response to market volatility, some of the major banks are increasingly leaning on their trading desks. Combined revenues from trading operations were up by approximately 1% across the five banks with significant Wall Street units. Bank of America witnessed a 10% boost in equity trading, while Citigroup’s revenue from fixed-income trading surged by 12% from the previous year.
The banks are anxiously awaiting signals from the Federal Reserve indicating a halt in interest rate hikes. They posit that this will mark the resurgence of confidence for many of their major corporate clientele. Gorman emphasized, “the M&A and underwriting calendar will explode because there is enormous pent-up activity,” emphasizing that the turning point will be when rates start to recede.
“Unfortunately, I’m not going to be around to enjoy it,” lamented Gorman, who disclosed his plans to step down as CEO within the next year back in May.
As Wall Street deal-making profits face uncertainty in the short term, executives are looking ahead to 2024 with hopes of a robust resurgence in activity.
Source: Yahoo Finance
