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The early stages of a long-awaited recovery in investment banking fees will boost Wall Street lenders when they report second-quarter earnings starting this week, with mergers and debt deals rebounding after two weak years .
Analysts expect investment banking income at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup to rise more than 30 percent on average from a year ago during the second quarter, according to estimates compiled by Bloomberg.
“You’re starting 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 releases earnings on July 15, followed by Morgan Stanley and BofA a day later. Overall, rising defaults are expected to contribute to uncertain earnings growth for many of the largest US lenders this quarter.
The revival of deals, however, could be a bright spot. Analysts predict that the bottom lines of Goldman and Morgan Stanley, whose businesses have the most exposure to investment banking, will benefit the most. Big deals that closed in the second quarter included ExxonMobil’s $60 billion acquisition of Pioneer Natural Resources in May, which was brokered by Citigroup, Goldman and Morgan Stanley, and Aon’s $13 billion acquisition of insurance broker NFP in April, which was led by Citi and BofA, among others.
In what has been a brutal reminder of the industry’s swings from feast to famine, investment banking earnings fell last year from record highs in 2021 to the lowest in years. Rising interest rates from central banks around the world have dampened M&A activity and new stock market listings.
Wall Street bosses have been talking about a recovery for more than a year – the heads of Goldman Sachs and Morgan Stanley spoke of the “green shoots” of a recovery as early as 12 months ago – but business has taken longer to recover than originally expected.
In a jolt of optimism, JPMorgan told investors last month that investment banking revenue growth during the second quarter would rise to 30 percent, double what the bank had originally forecast.
Smaller rival Jefferies last week reported that investment banking revenue in the three months to the end of May rose almost 60 percent from a year earlier. Its senior management said it was “increasingly optimistic” about the second half of 2024 and 2025.
The rebound has been helped 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, fitness company Peloton refinanced $1.35 billion in debt in May in a deal that was led by JPMorgan and Goldman.
Bankers are not predicting a return to the levels of investment banking activity seen in 2021 and 2022, when low interest rates and government stimulus during the coronavirus pandemic led to a surge in M&A and IPOs.
Bankers have pointed to the need for private equity firms to exit existing investments and deploy trillions of dollars in dry powder, and for corporations to overhaul their supply chains and grapple with rapid advances in technologies such as artificial intelligence.
“We have capital markets activity that is still below the normal trend line and is on the rise,” said Betsy Graseck, a banking analyst at Morgan Stanley. “That tailwind, we think will emerge in the quarter and continue through the rest of this calendar year and into 2025.”
Investors have also been concerned that persistently higher interest rates could lead to more borrowers defaulting on their loans, with loan losses in recent years coming from historically low levels.
Analysts expect JPMorgan, BofA, Citi and Wells, the four largest US banks by deposits, to report more than $7 billion in the second quarter in so-called charges, which are losses on loans marked as uncollectible. This would be more than 50 percent compared to the previous year.
“We’re still at a stage where I would characterize things as normalizing rather than getting more markedly worse,” said Scott Siefers, banking analyst at Piper Sandler. “Almost every bank investor on the planet is acutely focused on commercial real estate in particular.”