Achi news desk-
Wall Street bosses are finally seeing signs of a broader rise in investment banking, but they’re not cheering too loudly just yet.
Investment banking divisions showed solid growth in the first quarter for the largest US banks, which reported surging revenues and fees. Capital markets led the comeback, executives said.
“We have strong backlogs and momentum across the company,” Morgan Stanley’s new MS-N chief executive Ted Pick told analysts on a conference call after his first quarter at the helm. “While the pipelines are healthy, there remains a backdrop of economic and geopolitical uncertainty.”
Morgan Stanley’s investment banking revenue jumped 16 percent to US$7 billion in its first quarter, it reported Tuesday, sending shares up more than 3 percent.
At Bank of America BAC-N, fees from investment banking rose 35 percent to US$1.6-billion, but its stock fell more than 4 percent as it set aside more money for sour loans.
“We are happy to see the investment banking activity improving,” BofA finance chief Alastair Borthwick told journalists. He referred to efforts to deepen its presence in middle markets and promote cooperation between corporate and commercial bankers.
“It appears that a rising tide has been lifting all boats in the capital market here,” said David Wagner, portfolio manager at Aptus Capital Advisors, adding that Morgan Stanley’s performance was “excellent.”
The results echoed strong performances at Goldman Sachs GS-N, JPMorgan Chase JPM-N and Citigroup CN. While executives noted the return of some activity, they were also quick to point out risks, including interest rate uncertainty, escalating geopolitical conflict and the US election.
“I have said before that the historically low activity levels would not last forever,” Goldman CEO David Solomon told investors on a conference call on Monday. “CEOs need to make strategic decisions for their companies, companies of all sizes need to raise capital and financial sponsors need transactions to generate returns for their investors.”
Goldman shares rose 3 percent after profits rose 28 percent, beating analysts’ expectations.
Equity capital markets have been a bright spot in recent months as several prominent initial public offerings (IPOs) fueled optimism that more activity would follow.
“We are cautiously optimistic that we could see the IPO market slowly reopen in the second quarter,” Citigroup CEO Jane Fraser told analysts on Friday.
Citi’s investment banking fees rose 35 percent in the first quarter, lifted by debt and equity capital markets. Yet mergers and acquisitions (M&A) were still slow to emerge, Ms Fraser said.
“Corporate sentiment is quite positive, particularly in the US, and our clients around the world have very strong balance sheets,” he said. Still, markets were too “benign” in pricing in risk factors such as geopolitical conflict, he added.
Citi hired former JPMorgan investment banking head Viswas Raghavan, who is tasked with growing its banking revenue when he joins later this year.
At JPMorgan, chief financial officer Jeremy Barnum also struck a cautious note even as investment banking revenue rose 27 percent to US$2 billion.
“While it is encouraging to see some positive momentum in M&A announced in the quarter, it remains to be seen whether that will continue,” Mr. Barnum told analysts on a call Friday. “And the advisory business still faces structural headwinds from the regulatory environment.”
Mr Pick Morgan Stanley is more optimistic than other CEOs on the impact of geopolitical risks, saying that in some cases it can even create an incentive for international deals if global conflicts affect supply chains.
“We are in the early innings of a multi-year M&A cycle,” said Mr. Pick at Morgan Stanley, who described investment banking and capital markets as being at the beginning to the middle of the business cycle. “We should continue to see all kinds of underwriting … I feel good about this.”
Major M&A announcements in multiple industries presented recent signs of growing confidence from CEOs and boards, which would support capital markets, Ms Fraser said.
Mr Solomon Goldman expects private equity firms, or financial sponsors, to become more involved in deals in an effort to start returning capital to investors.
Meanwhile, Ms Fraser noted that financial sponsors are sitting on US$3-trillion that need to be used.
Citigroup shares are up nearly 11 percent so far this year, outperforming peers including JPMorgan and Bank of America, which have gained 6 percent and 3 percent, respectively. Goldman shares have risen 3 percent, which contrasts with a 3 percent drop for Morgan Stanley. The S&P 500 banks index has climbed 6 percent.
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