Stronger investment banking and capital markets activity boosted the first set of second-quarter results released by U.S. banks today.
Citigroup’s investment banking revenue rose 60% year-on-year to $853 million in the three months to the end of June, and its quarterly profit beat analyst expectations, while JPMorgan’s quarterly banking fees rose to $2.3 billion, also beating analysts’ expectations, and equity trading and fixed-income revenue rose 21% and 5%, respectively, from a year earlier.
Merger and acquisition value is expected to reach $1.6 trillion in the first half of 2024, up 17% from a year earlier, according to data provider Mergermarket. Deals involving large public companies were especially active in the U.S. and U.K., signaling a broader reopening of capital markets after several years of stagnation.
Wells Fargo’s corporate and investment banking division was a bright spot for the bank after its disappointing second-quarter results. Revenue there rose 4.5% from a year ago but was lower than in the first three months of the year. BNY Mellon also saw an increase in investment-banking fees in the quarter.
Goldman Sachs is due to report results on July 15, while Morgan Stanley and Bank of America are due to report on July 16.
“Second-quarter results should be a positive sign across the capital markets,” said Michael McTamney, senior vice president of North American financial institutions credit ratings at Morningstar. “Investment banking fees should be solid, and on the trading side we should see consistent or better performance than in the same period last year. We also expect global investment banking fee revenues to be higher than pre-COVID levels.”
McTamney added that a soft landing in interest rates would create a favorable backdrop for broader economic activity.
Bank failure
In financial results released today, Citi reported second-quarter 2024 net income of $3.2 billion, or $1.52 per diluted share, on revenue of $20.1 billion. This compares with net income of $2.9 billion, or $1.33 per diluted share, on revenue of $19.4 billion in the same period last year.
“Our performance demonstrates the progress we are making in executing our strategy and the benefits of our diversified business model,” Chief Executive Jane Fraser said in prepared comments.
That was underscored by JPMorgan’s strong results, which were in line with expectations, with second-quarter net profit of $13.1 billion.
Chief Executive Officer Jamie Dimon highlighted performance from the bank’s commercial and investment banking divisions, where investment banking fees rose 50% from the second quarter of last year.
Wells Fargo’s shares fell after the bank reported $4.9 billion in net income, below analyst expectations, but Chief Executive Charlie Scharf highlighted strong results in advisory, trading and investment-banking fees.
McTamney also said the market supports Goldman’s CEO’s strategy to pivot away from consumer banking and refocus the bank on its core businesses.
“Looking at stock prices, [Goldman Sachs] “The company has performed very well this year, and we expect its asset and wealth management division to continue to show growth, as well as good metrics from its investment banking and trading divisions,” he said.
But the earnings call is also likely to include questions about how Goldman performed in the Federal Reserve’s annual stress test in late June. The bank passed the test but received a lower-than-expected rating. Higher capital requirements could shrink the bank’s ability to lend and trade.
“This is a black box operation so the banks can’t say anything publicly,” McTamney added.
Morgan Stanley derives half of its revenue from asset management and investment administration, so it is expected to perform well again this year.
“From an equity perspective, the bank is trading at a premium relative to its peers because its business model is easy to understand,” McTamney said.
Bank of America analysts wrote that a sustained recovery in investment banking and strong trading could lead to upward earnings per share revisions for Goldman Sachs and Morgan Stanley.
Including CRE
Beyond the reopening of capital markets, there are notable stresses in the U.S. and European commercial real estate markets, with a recent report from S&P Global Ratings citing rising interest rates, e-commerce and the growing popularity of remote work brought on by the COVID-19 pandemic as creating unprecedented levels of stress in CRE.
The firm added that some sectors are now facing greater declines in market value than they did during the global financial crisis, with office and retail real estate in particular seeing their market values ​​fall significantly over the past few years in both the US and Europe.
Commercial mortgage-backed securities have seen a corresponding increase in credit risk.
“Green Street data shows that market value declines have been most pronounced in ‘B’/’B+’ grade office properties, particularly in the U.S., where property values ​​have fallen an average of 59% between the start of 2020 and the latest available date of 2024,” the report noted.
Wall Street banks tend to have limited exposure to office CRE loans as they make up a relatively small percentage of their overall portfolio. They also have diversified revenue streams and their CRE loans tend to be of the highest quality for investment grade loans.
In a previous report, S&P looked at the office CRE exposure of global systemically important banks and noted that they account for just 3-4% of their total loans. For regional banks, these CRE loans can reach 30%.
The Fed’s stress tests factored in real estate losses for large banks in a recession scenario, with office real estate values ​​– the most vulnerable asset — falling 40%, with a median loss rate of 8.8%.
“CRE alone probably won’t affect the ratings of large G-SIBs. Something else will have to happen,” said Stuart Presser, managing director of financial institutions at S&P Global Ratings.
