There are green shoots again on Wall Street. This time, however, executives are more cautious about saying so.
Overall, five of the largest banks reported a 3.5% increase in investment banking revenue in the fourth quarter compared to the same period last year, driven largely by equity and bond underwriting rather than mergers and acquisitions advisory.
These fees rose 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) fell 12%, but its revenue still rose 6% from the third quarter.
It was a pleasing development at the end of a challenging year. But officials were cautious in how they described the renewed activity in investment banking in conference calls with analysts. Last year, some executives had to dial back their talk of “green shoots” after the hoped-for surge in deals failed to materialize.
Goldman CEO David Solomon described his assessment on Tuesday as “fairly optimistic” but noted that the company continues to take a “cautious view.” Morgan Stanley CEO Ted Pick used the word “constructive” to describe the coming year.
Ted Pick, the new CEO of Morgan Stanley. (Jeenah Moon/Portal) (Portal / Portal)
Bank of America CEO Brian Moynihan announced a “full pipeline” of potential deals, but then noted that “the question is when there will be clarity.”
Much depends on a revival of Wall Street in 2024. Banks will have to rely heavily on their investment banking business this year as their trading results continue to fall and lending income falls as the Federal Reserve cuts interest rates.
While lower interest rates will help reduce deposit costs and stimulate demand for new loans, they also mean banks may not be able to charge as high interest rates on new loans. Higher interest rates gave the largest banks a turbocharged profit boost in 2023.
Even JPMorgan, which generated an industry record of about $50 billion in net profits last year, warned that its loan income would likely fall every quarter in 2024 if the Fed cuts materialize.
The story goes on
For investment banking to gain traction in 2024, many things need to be right. Not only does the economy need to get going, but business leaders also need to be much more confident about the future.
Wall Street expects the spark to lead to the end of the Fed's aggressive monetary tightening campaign as early as March.
One danger is that the Fed doesn't act on the same timetable, or that inflation rises again, forcing the central bank to keep interest rates higher for longer. Another reason is that interest rates are falling because a recession is raging.
No company is better prepared for an eventual recovery than Goldman, which struggled for much of 2023, in part because of its worst fiscal year in a decade.
Its CEO, Solomon, was under pressure to pull off a difficult consumer lending cut while focusing the company on its core competencies of trading, wealth management and investment banking.
“A change in Federal Reserve monetary policy could finally lead to a significant improvement in investment banking conditions, giving Goldman a much-needed tailwind,” RBC banking analyst Gerard Cassidy said in a note on Tuesday.
Solomon told analysts on Tuesday: “I believe there will be some more significant IPOs in 2024 and there will be more activity and more engagement, especially in bond and equity issuances.” Goldman, he added, “is incredibly well prepared for this upswing.”
David Solomon, CEO of Goldman Sachs. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)
It can be notoriously difficult to predict the outlook for business on Wall Street, as these outcomes can fluctuate depending on CEO confidence, which is influenced by a variety of economic, geopolitical and corporate uncertainties.
Trading, on the other hand, is primarily driven by volatility and whether trading departments choose to react to market fluctuations. Such volatility can be extremely profitable or costly.
The big five banks with large trading desks reported double-digit declines in equity and fixed income revenue, particularly in fixed income trading, compared to the third quarter.
Citigroup reported the largest declines, 19% from the same period last year and 29% from the previous quarter.
“We are seeing improved confidence among CEOs,” Citigroup CFO Mark Mason said Friday. “Of course, the timing of a robust recovery is uncertain,” he added.
Morgan Stanley is another firm hoping for a trading recovery in 2024 and continued momentum in investment banking.
Pick, who took over as CEO on Jan. 1, said the company's base case is a “favorable soft landing” for the U.S. economy.
If the economy slows dramatically in the coming quarters and the Fed needs to take rapid action to cut interest rates, “activity levels and asset prices would likely be lower.” Unless inflation is curbed, higher interest rates will keep the cost of capital higher for longer.
These risks present some uncertainty as we enter 2024, he said. “We continue to look ahead constructively to the coming year.”
David Hollerith is a senior reporter at Yahoo Finance, covering banking, crypto and other financial areas.
Click here for a detailed analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance