Wall Street slammed investment banking, as executives expect more confidence ahead

Morgan Stanley and Goldman Sachs reported declining fourth-quarter profits on Tuesday, as Wall Street traders braced for a sharp decline in their businesses in 2022 due to mergers, acquisitions and initial public offerings. Rising interest rates spooked markets last year and sank global investment banking revenue. That’s up more than 50% from the year-ago quarter, according to data from analytics firm Dealogic.

Banks are looking to a peak in the US Federal Reserve’s aggressive rate hikes to bring confidence back into boardrooms as well as reduce sharp volatility in market prices.

“I have every confidence that when the Fed pauses (rate hikes), deal activity and underwriting activity will pick up,” Morgan Stanley Chief Executive Officer James Gorman said on the bank’s earnings call.

Morgan Stanley CFO Sharon Isaiah said she was expecting that the pipeline of deals would be more active when “there is a policy pivot of peak inflation, something that allows CEOs who are actually negotiating in the boardroom to have more confidence.” Huh.”

He added that the CEOs were also looking for “value clarity and valuation certainty”.

The decline in investment banking has led to deep job cuts, with Goldman Sachs letting go of more than 3,000 employees in its biggest round of job cuts since the 2008 financial crisis, while Morgan Stanley cut nearly 1,600 employees. Is. Overall, global banks are in the process of cutting more than 6,000 jobs.

“CEOs and boards tell me they are especially cautious near-term,” said David Solomon, chief executive of Goldman Sachs. Slide in the market.

“It takes time for people to adjust,” Solomon said, adding that his experience was “4-6 quarters”.

Solomon also said the first sign to watch would be in the investment grade debt market.

Solomon said his expectations would be “meaningfully better” for “the second half of 2023”, adding that he was heading to Davos, where he remarked that people were looking for a soft landing for the economy. were.

The annual meeting of the World Economic Forum is taking place in Davos this week. Two-thirds of chief economists in the private and public sector surveyed by the WEF expect a global recession this year.

Top bankers recently told Reuters they see an M&A recovery in the second half of 2023. Large investors are sitting on piles of cash and preparing to trade, and large companies with solid profits are looking to diversify their businesses, but they are waiting for an economic return. Uncertainty to fade.

If the market recovers, Goldman’s investment bankers will profit. According to Dealogic data, the firm has been the top global M&A advisor by revenue for the past 20 years, followed by JPMorgan.

Very little

Across the board, investment banking fees were sharply lower.

Morgan Stanley’s revenue from its investment banking business fell 49% in the fourth quarter while Goldman Sachs’ investment banking fees fell 48%.

JPMorgan’s investment banking unit saw its revenue plunge 57%, Citigroup Inc’s investment banking revenue plunged 58%, while Bank of America Corp’s investment banking fees fell by more than half. Investment bank Jefferies Financial Group plunged 52.5%.

This fed into a poor quarter overall, with the six largest lenders, JPMorgan, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs, reporting profits ranging from 6% to 69%. Strength in trading helped offset a slump in investment banking, while a rate hike by the US Federal Reserve helped earnings.

On Wednesday, shares of Goldman fell 7.5%, although Morgan Stanley was up 6.7% as its earnings beat expectations on strength in its wealth business and trading.

Those six accumulated roughly $6 billion in reserves to prepare for bad loans of $5.7 billion, against average estimates by Refinitiv. JPM raised $1.4 billion, Wells Fargo $957 million, Bank of America $1.1 billion, Citi $640 million, Morgan Stanley increased its provisioning for credit losses to $87 million, while Goldman Sachs increased its provisioning for credit losses to $87 million. The provision was made to $972 million.

The text of this story is published from a wire agency feed without any modification.