Capital markets comeback lifts outlook for US investment banks

A pick-up in investment banking and capital markets activity has boosted the first round of second-quarter earnings for US banks published today. 

Investment banking revenues surged 60 per cent year on year to $853mn for Citigroup in the three months to end-June, boosting quarterly profits above analysts’ expectations. JPMorgan meanwhile recorded $2.3bn in banking fees for the quarter, coming in ahead of analyst forecasts, with equity trading and fixed income revenues increasing by 21 per cent and 5 per cent, respectively, year on year. 

Mergers and acquisitions value increased 17 per cent year on year to $1.6tn in the first half of 2024, according to data provider Mergermarket. Dealmaking involving large listed companies was particularly active in the US and UK. These point to a broader reopening of capital markets after a subdued couple of years.

Wells Fargo’s corporate and investment banking was a bright spot for the lender in its disappointing Q2 results, with revenue for the segment up 4.5 per cent compared with the year-ago quarter, but lower than the first three months of the year. BNY Mellon also saw an increase in investment banking fees for the quarter. 

Goldman Sachs will publish results on July 15, while Morgan Stanley and Bank of America will follow on July 16.

“Overall capital markets should be a bright spot in the second-quarter results,” said Michael McTamney, senior vice-president, credit ratings North American financial institutions, Morningstar. “Investment banking fees should be robust and on the trading side we think that the performance will be in line if not better than prior-year results. We also believe the global investment banking fee wallet is probably higher than where it was pre-Covid.”  

A soft landing on interest rates provides a positive backdrop for broader economic activity, McTamney added.

Bank breakdown  

In its results published today, Citi reported net income for Q2 2024 of $3.2bn, or $1.52 per diluted share, on revenues of $20.1bn. This compares to net income of $2.9bn, or $1.33 per diluted share, on revenues of $19.4bn for same period last year.

In prepared comments, chief executive Jane Fraser said: “Our results show the progress we are making in executing our strategy and the benefit of our diversified business model.” 

JPMorgan posted a strong set of results in line with expectations, which was borne out with $13.1bn of net income generated in the second quarter.

CEO Jamie Dimon drew attention to the performance of the commercial and investment bank where investment banking fees rose 50 per cent from the second quarter of last year. 

In Wells Fargo’s results, the bank reported net income of $4.9bn that fell short of analyst forecasts and shares dropped as a result. However chief executive Charlie Scharf highlighted the better performance across investment advisory, trading and investment bank fees. 

McTamney also said that the market supports Goldman’s chief executive’s strategy that refocused the bank on core business lines by pivoting away from consumer banking.

“If you look at the share price, it [Goldman Sachs] has done very well this year. Also its asset and wealth management segment will continue to show growth while the investment bank and trading indicators should be good,” he said.   

But there are very likely to be questions on the results call about Goldman’s performance in the Federal Reserve’s annual stress test at the end of June. While it passed the exercise, the bank received a lower grade than anticipated. The higher capital requirement could curtail its capacity to lend and trade. 

“The bank won’t be able to say anything publicly as it is a black-box exercise,” McTamney added.    

Morgan Stanley should have another steady performance as half of its revenues come from wealth and investment management.

“From a stock perspective its business model is easy to understand and that is why the bank trades at a premium compared to peers,” McTamney said. 

Bank of America analysts wrote that a sustained rebound in investment banking and resilient trading create potential for positive revisions to earnings per share for Goldman and Morgan Stanley. 

CRE contained 

Outside of the reopening of capital markets there is notable stress in the US and European commercial real estate markets. A recent report from S&P Global Ratings noted that higher interest rates, e-commerce, and the jump in popularity of remote working introduced by the Covid-19 pandemic have produced unprecedented levels of stress in CRE.

It added that some segments are now facing market value declines that are greater than during the global financial crisis. In particular, the market value of office and retail properties has declined significantly over the past several years in both the US and Europe.

Commercial mortgage-backed securities have seen a corresponding rise in credit risk. 

“The most striking market value declines have been in the class ‘B’/‘B+’ office segment, particularly in the US, which has seen an average 59 per cent drop in property values between the beginning of 2020 and the latest reading in 2024, according to Green Street data,” the report noted. 

Wall Street banks tend to have limited office CRE exposure as the loans are a relatively small percentage of their overall portfolios. They also have diversified revenue streams and their CRE loans tend to be the best investment-grade quality. 

S&P looked at the exposure of global systemically important banks to office CRE in an earlier report noting they only account for between 3 per cent and 4 per cent of total loans. At regional banks these CRE loans could be as high as 30 per cent.    

The Fed’s stress test incorporated CRE loss rates in a recessionary scenario for the large banks. It assumed a 40 per cent decline in CRE prices in the most vulnerable assets meaning offices. The loss rates at the median were 8.8 per cent.

Stuart Plesser, financial institutions managing director, S&P Global Ratings, said: “CRE on its own would probably not have a rating impact on a large G-SIB. Other things would have to happen.”