Green shoots are coming back to Wall Street. But executives are more cautious about saying that this time.
Five of the largest banks combined saw investment banking revenue rise 3.5% in the fourth quarter from the same period a year ago, thanks largely to underwriting of stocks and bonds rather than advising on mergers and acquisitions.
These fees rose by 16% at Citigroup (C), 13% at JPMorgan Chase (JPM), 8% at Bank of America (BAC), and 5% at Morgan Stanley (MS). Only Goldman Sachs (GS) showed a decline, down 12%, but its revenues remained up 6% from the third quarter.
It was a welcome development at the end of a challenging year. But officials were cautious in how they described the renewed investment banking activity in conference calls with analysts. Last year, some executives were forced to back away from talk of “green shoots” after a hoped-for increase in deals failed to materialize.
Goldman CEO David Solomon on Tuesday described his view as “very optimistic” but noted that the company continues to take a “cautious view.” Ted Beck, CEO of Morgan Stanley, used the word “constructive” to describe the year ahead.
Bank of America CEO Brian Moynihan touted a “full pipeline” of potential deals but then noted that “the question is kind of when will there be clarity.”
There's a lot riding on Wall Street's recovery in 2024. Banks will need to lean heavily on their investment banking operations this year if their trading results continue to decline and lending income declines while the Federal Reserve cuts interest rates.
While lower interest rates will help reduce deposit costs and could boost demand for new loans, it also means that banks may not be able to charge as much interest on new loans. Higher interest rates stimulate profits for the largest banks in 2023.
Even JPMorgan, which generated an industry record of about $50 billion in net profits last year, warned that its lending income would likely decline each quarter through 2024 if the Fed's cuts materialize.
For investment banking to rebound further in 2024, many things will need to go right. Not only does the economy have to take off, but business leaders have to become more confident about the future.
Wall Street is betting that the spark will be the end of the Fed's aggressive monetary tightening campaign as early as March.
One risk is that the Fed doesn't act on the same schedule, or inflation rises again, forcing the central bank to keep interest rates higher for longer. The other reason is that interest rates are falling because the recession is intensifying.
No company is better prepared for a potential rebound than Goldman Sachs, which has struggled through much of 2023, in part due to the worst year for dealmaking in a decade.
Its chief executive, Solomon, has been under pressure to implement a tough cut in consumer lending as the company refocuses on its core strengths in trading, asset management and investment banking.
“A change in Fed monetary policy could finally lead to a significant improvement in investment banking conditions that will provide a much-needed tailwind” to Goldman, Gerard Cassidy, a banking analyst at RBC, said in a note on Tuesday.
“I think you're going to see some more significant IPOs in 2024, and just across debt and equity issuance you're going to see more activity and more participation,” Solomon told analysts on Tuesday. He added that Goldman “is benefiting incredibly from this capture.”
Predicting the outlook for Wall Street operations can be extremely difficult, since these results can fluctuate depending on the confidence of CEOs who are affected by a variety of economic, geopolitical and corporate uncertainties.
Trading, on the other hand, is mostly driven by volatility and whether trading desks choose to act based on market fluctuations. Such volatility can be highly profitable or costly.
The Big Five banks with large trading desks saw equity and fixed income revenues decline by double digits compared to the third quarter, especially in fixed income trading.
Citigroup announced the largest declines of 19% over the same period last year and 29% over the previous quarter.
“We are seeing an improvement in confidence among CEOs,” Citigroup Chief Financial Officer Mark Mason said Friday. “Of course, the timing of a strong recovery is uncertain,” he added.
Morgan Stanley is another firm hoping for a trading rebound in 2024 and continued momentum for investment banking.
Beck, who took over as CEO on Jan. 1, said the company's base case is a “soft, benign landing” for the U.S. economy.
If the economy weakens significantly in the coming quarters and the Fed is forced to move quickly to cut interest rates, “activity levels and asset prices are likely to be lower.” If inflation is not overcome, higher interest rates for a longer period will keep capital costs expensive.
He said these risks raise some doubts at the beginning of 2024. “We remain constructive for next year.”
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrency, and other areas of finance.
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