Wall Street lenders are set to post higher investment banking fees for the second quarter of 2024, as early signs of a rebound in dealmaking partly offset weaker growth in lending income.
JPMorgan Chase, Citigroup and Wells Fargo are due to report their earnings on Friday.
Goldman Sachs’ results are scheduled for next Monday, before Morgan Stanley and Bank of America on the Tuesday.
The lenders’ earnings are set to be hit by rising defaults and falling net interest income – the difference between what a bank earns on loans and pays for deposits – as interest rates stay higher for longer.
However, looming rate cuts from the Federal Reserve and expectations of a soft landing for the US economy have bolstered investors’ appetite for mergers, acquisitions and debt offerings.
Overall US deal value was $535bn (£417bn) in the first five months of 2024, up nearly 30 per cent from the same period last year, according to PwC – helped by artificial intelligence and the energy transition.
Meanwhile, the US stock market has touched record highs this year and is seeing a pickup in IPO activity.
Analysts expect second-quarter investment banking revenues at JPMorgan, Goldman, Morgan Stanley, BofA and Citi – the five biggest players – to increase more than 30 per cent from the previous year, according to Bloomberg data.
Troy Rohrbaugh, the newly promoted co-CEO of JPMorgan’s commercial and investment bank, told investors last month to expect investment banking revenues to come in at double what the firm had initially expected, rising as much as 30 per cent.
Also in June, Citi’s chief financial officer Mark Mason pointed to a pickup in investment banking activity compared to last year, driven by M&A and capital raises.
Alison Williams, an analyst at Bloomberg Intelligence, told City A.M. that Citi could report a more than 50 per cent jump in fees for last quarter.
Goldman and Morgan Stanley’s business models are weighted the heaviest towards investment banking. The latter has diversified towards wealth management to offset volatility from dealmaking and capital markets.
Investment banking revenues on Wall Street plunged to fresh lows in 2023, after record highs just a year before spurred by ultra-low interest rates.
But second-quarter results from Jefferies late last month, considered an indicator for bigger Wall Street firms, beat analysts’ estimates as its investment banking revenue soared 59 per cent on higher advisory fees and a strong performance in equity and debt underwriting.
“Investment banking fees could grow at a strong 25 per cent or clip from a year ago, rising from lows but with plenty of room to further improve, especially for IPOs and M&A,” Williams said.
“Global banks’ debt underwriting activity looks robust in the second quarter, while equity issuance should help fuel year-over-year growth. Notably, relatively more profitable high-yield debt and European and US IPOs are set to aid revenue for the largest competitors.”
Morgan Stanley analyst Betsy Graseck showed a preference for Citi, JPMorgan and Wells Fargo among big banks going into the earnings.
“Expect both earnings and forward commentary to add further confirmation that we are still in the early stages of a multi-year global capital markets recovery off of multi-decade lows versus nominal GDP,” she said in a note.
Analysts expect banks’ funding costs to start falling as the Fed begins cutting interest rates in the coming months, while loan growth should benefit from the improving economy.
“The set up looks very good for the banks over the next 18 months,” Gerard Cassidy, of RBC Capital Markets, said in a note. “We continue to recommend investors overweight bank stocks in portfolios.”