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A rise in investment banking activity has spurred triple-digit profit growth and soaring revenues at some of the biggest global financial institutions in the first half of this year.
Results at the six largest U.S. banks — Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo — were boosted by a continued rebound in investment banking activity that helped offset some of the challenges facing banks, including pricier deposits and growing credit risks, Moody’s analysts said in a research note.
Goldman’s profits soared 150% year-over-year to $3.04 billion in the second quarter, accompanied by a 21% rise in investment banking fees; Morgan Stanley’s investment banking revenues jumped 51%; JPMorgan’s newly reshuffled investment banking division posted a record $35.5 billion of revenue for the first half of the year, with investment banking fees climbing 50% in the second quarter; and at Citi, investment banking fees shot up 63% to $935 million.
One of the key sources of revenue at investment banking is underwriting, in which an investment bank, on behalf of a client, raises capital from institutional investors in the form of debt or equity.
“What we’ve seen thus far is certainly the first two quarters this year, very significant amount of debt underwriting, equity underwriting certainly picking up,” said David Fanger, senior vice president in the financial institutions group at Moody’s.
An increase in mergers and acquisitions (M&A) is also playing a large part in this year’s investment banking renaissance. During the first six months of 2024, the U.S. M&A market saw 694 large deals (worth $100 million or more) totaling $884 billion, according to recent data from consulting firm EY. That’s up 35% from last year, and on pace to surpass the $1.6 trillion in total deals recorded in 2023.
“From what we’re seeing, we are in the early innings of a capital markets and M&A recovery,” Goldman CEO David Solomon told analysts. “And while certain transaction volumes are still well below their 10-year averages, we remain very well-positioned to benefit from a continued resurgence in activity.”
This activity looks like the beginning of a rebound. Starting in the latter half of 2020 and through 2021, there was a “tremendous amount of activity” in the M&A sector, thanks to very low interest rates and significant amount of monetary and fiscal stimulus that took place, Fanger said. But once the Federal Reserve began raising rates in March 2022, that activity slowed substantially.
Mitch Berlin, vice chair of EY Americas’ strategy and transactions division, said the rebound is not just because of the amount of M&A activity, but because of the price tags.
“I think it’s the size of the deals,” Berlin said. “The deals are much bigger and so, you know, they get compensated when the deal closes. And if you look at the average ticket of the deal over the last two years, they’ve been bigger.”
“There have been some nice, mega, mega deals over the last year,” he added.
The technology and energy sectors are leading in deals. With the rise of artificial intelligence, tech and non-tech companies alike have begun to acquire startups and competitors to help bolster their AI capabilities, Berlin said. Under the energy umbrella, oil and gas deals have also picked up steam with multi-billion dollar deals, like ExxonMobil’s $60 billion acquisition of Pioneer Natural resources, which was approved by regulators in May. Goldman Sachs, Morgan Stanley, Petrie Partners, and Bank of America Securities served as Pioneer’s financial advisors.
Investment banks also get revenues from advising on initial public offerings (IPOs) and take-privates, which have both been on the rise this year too. With stronger capital markets, Berlin expects companies to feel more confident about going public and having the funding to finance bigger deals — which means continued momentum for investment banks. Morgan Stanley chief executive Ted Pick acknowledged these factors in a call with analysts last month.
“We’ve been seeing now the launch of traditional IPOs and we’re seeing M&A pipeline kicking in,” he said. But it’s not just that. Pick pointed to bespoke offerings in the private/public space, including interest rate and foreign exchange hedging and the “other ornaments on the investment banking tree that a couple of the leading global investment banks can bring.”
This activity is expected to continue —and likely pick up — in the second half of the year, with EY projecting corporate M&A deal volume to rise 20% in 2024 (a sharp reversal from a 17% contraction in 2023). Berlin said the rally will really start when the Fed carries out its first interest rate cut, which is widely expected to take place in September.
The tailwinds that have been driving the resurgence in investment banking, including higher equity values and higher asset values, have also been helping drive asset and wealth management businesses — giving investment banks yet another boost.
“There’s no magic to it,” Fanger of Moody’s said. “Certainly the more benign economic outlook, the expectation for lower interest rates, has been contributing to this improvement in asset values, which is driving the revenue growth in those businesses in a related way to the way it’s improving activity and investment banking.”