Wall Street sees a glimmer of hope in the recovery of investment banks

Bloomberg — After more than a year of stalemate in the deal arena, the Wall Street giants are finally showing signs of life in their capital markets businesses.

Bank of America Corp. (Baccalaureate) and Morgan Stanley and JPMorgan Chase & Co. (JPM) and Citigroup Inc. (c.) beat analyst expectations for equity subscription revenue in the second quarter, as all but Citigroup earned more than a year earlier in that business. The largest banks (again excluding Citigroup) also beat debt underwriting estimates.

“Things seem to be improving and the signs are encouraging,” Sharon Yeshaya, chief financial officer of Morgan Stanley, said in an interview on Tuesday. The order book is piling up and “setting us up for a better 2024.”

The positive news, along with a surprising increase in fixed-income trading at Bank of America and upbeat comments from Morgan Stanley executives, helped lift stocks of financial companies large and small, including PNC Financial Services Group Inc. Bank of New York Mellon Corp. and Charles Schwab Corp. , which also announced results on Tuesday. The KBW Bank Index rose as much as 2.8%, hitting an intraday high in three months.

Investment banking returns have fluctuated in recent years. Insurance and trade fees have skyrocketed during the pandemic, buoyed by low rates and government economic stimulus, and eased last year after the Federal Reserve began raising interest rates to combat persistent inflation.

The New York-based bank said the increase in debt underwriting income was mainly due to the issuance of higher investment-grade bonds, while the increase in equity underwriting was the result of more subsequent and convertible offerings.

Jane Fraser, CEO of Citigroup, described a similar phenomenon at her bank on Friday. “Globally, we’re seeing less concern about funding as most of the big companies take the bait and pay higher rates to take advantage of the issuance windows.”announce. Similarly, management at Jefferies Financial Group Inc. Late last month, it announced the emergence of “green shoots” in its investment banking and capital markets business.

However, Wall Street leaders still do not consider a return as certain. M&A activity remains sluggish, with advisory revenue at Bank of America, Morgan Stanley, JPMorgan and Citigroup down 24% from the second quarter of 2022, when revenue was already down 16% from a year earlier.

Most companies downsized to adjust, even during the most recent quarter. Bank of America CFO Alistair Borthwick described his company’s efforts to downsize by laying off workers rather than downsizing as “a good job.” Morgan Stanley’s results Tuesday included $308 million in layoff costs, most of it related to its institutional securities unit, which includes commercial and investment banking.

“It’s too early to tell a direction from recent results, but we’ll see,” JPMorgan’s chief financial officer, Jeremy Barnum, said on Friday. He said the largest US bank had seen “encouraging signs of activity in the capital markets,” but “certainly there are still some M&A headwinds.”

Goldman Sachs (GS) Group is set to report its second-quarter results on Wednesday. Analysts expect the company’s equity underwriting proceeds to double from the previous year, to $292 million, while debt underwriting could drop 2%, to $446 million. Income from advising on mergers and acquisitions, for its part, will drop 35%.

With assistance from Sridhar Natarajan, Jenny Soran, and Kathryn Doherty.

Read more at Bloomberg.com