Major Wall Street investment banks have recently released their quarterly financial reports for the period ending March 2024. Notably, after two consecutive years of declining performance, the investment banking divisions of these large institutions appear to be on the mend.
Upon reviewing the data, two leading investment banks, Morgan Stanley (MS.US) and Goldman Sachs (GS.US), experienced a decline in their investment banking revenues in both 2022 and 2023. This downturn was attributed to the elevated cost of funds resulting from the Federal Reserve's interest rate increases.
However, by the first quarter of 2024, this trend has shown a reversal. Goldman Sachs' investment banking business saw a year-over-year quarterly revenue increase of 31.73%, reaching $2.08 billion. Similarly, Morgan Stanley's investment banking business grew by 16.04% to $1.447 billion.
Additionally, commercial bank JPMorgan Chase (JPM.US) reported a 20.98% growth in its investment banking business revenue, totaling $2.001 billion. These rising figures are indicative of a positive trajectory for the investment banking arms of these major institutions.
Which is the best investment banking business?
Investment banking revenue is primarily derived from three sources: advisory services, equity underwriting, and bond underwriting.
Advisory services encompass strategic consulting in areas such as mergers and acquisitions, disposals, corporate defense, restructuring, and spin-offs. It also includes specialized advice on cross-border structuring.
Equity underwriting services are provided during the equity financing process for publicly traded companies, which may involve common shares, preferred shares, convertible securities, and other equity-related transactions.
Bond underwriting services involve the underwriting of various debt instruments, including investment-grade and high-yield bonds, bank loans, bridge loans, and more. Investment banks also engage in acquisition financing and transaction financing, as well as underwriting and structuring complex financial arrangements like mortgage-related securities and asset-backed securities.
By examining the investment banking business structures of these major Wall Street players, one can discern their primary areas of focus.
- Goldman Sachs.
Goldman Sachs has long been a dominant force in advisory services, particularly in mergers and acquisitions (M&A) transactions. In the first quarter of 2024, Goldman Sachs' advisory services revenue increased by 23.59% year-over-year to $1.011 billion.
In contrast, Morgan Stanley and JPMorgan Chase saw their advisory services revenues decline by 27.74% and 20.90% year-over-year to $461 million and $598 million, respectively. This disparity underscores Goldman Sachs' formidable presence in the advisory services sector.
According to Dealogic, global M&A deal activity increased in the first quarter of 2024. However, fee income fell by 6% year-over-year to $7 billion, suggesting that a higher volume of smaller deals were completed during this period.
Dealogic also provided optimistic guidance, predicting a resurgence in large deals, particularly mega deals in the $2 billion to $5 billion and over $10 billion ranges. With 1,700 deals pending at the beginning of April, this could translate into fee income of $3 billion to $7 billion upon completion.
- JPMorgan Chase
JPMorgan Chase, leveraging its extensive commercial banking background, has shown a distinct competitive advantage in bond underwriting. In the first quarter of 2024, JPMorgan's bond underwriting revenue grew by 58.07% year-over-year to $1.048 billion, outperforming both Goldman Sachs and Morgan Stanley.
During the same period, the bond underwriting revenues of Goldman Sachs and Morgan Stanley grew by 38.14% and 36.61% year-over-year to $699 million and $556 million, respectively.
Dealogic reported that bond underwriting and loan financing services had the strongest performance in the first quarter of 2024, with global debt financing fee income soaring by 40% year-over-year to $2.7 billion. This growth was largely driven by debt financing for acquisitions in sectors such as technology, oil and gas, and healthcare.
- Morgan Stanley.
Morgan Stanley stands out among its peers in the equity business. In the first quarter of 2024, signs of a market rebound were evident, with Dealogic estimating a 17% year-over-year increase in fee income from the equity segment to $3.3 billion.
The U.S. market, which accounts for over half of the market share, contributed to this rebound with increased revenues from IPOs, post-IPO additions, and convertible securities. Additionally, the Japanese, Canadian, and UK markets reported year-over-year fee growth, compensating for the decline in China, which was once the second-largest market for equity banking revenues.
Morgan Stanley's equity underwriting revenue saw a substantial year-over-year increase of 112.87%, reaching $430 million in the first quarter of 2024. This figure surpassed the $370 million and $355 million reported by Goldman Sachs and JPMorgan Chase, respectively.
It is important to note that equity underwriting engagements typically involve multiple investment banks, with each receiving a different share of the handling fee. Caihua News Agency highlighted that Morgan Stanley has participated in the five highest issuance cost underwriting projects so far this year, which may contribute to its superior income.
The largest project is the spin-off of luxury brands like Beginner's Bird by Anta (02020. HK), and Amaphen Sports (AS.US), with net proceeds of $1.476 billion and offering costs of about $95 million, with lead underwriters Goldman Sachs, Bank of America, JP Morgan, Morgan Stanley, and others.
The second-largest IPO deal - Reddit (RDDT.US), which became famous for its battle with retail investors to force out short-selling institutions - may cost $66.27 million for the offering, and the lead underwriters may include Morgan Stanley, investment firm Piper Sandler, and others.
The outlook for bond, equity, and M&A deal activity is expected to remain robust as central banks in Europe and the U.S. reverse their interest rate cycles. This shift should lead to a more optimistic outlook for the major investment banks' businesses in the coming quarters.
Bain Capital reported that global M&A deals were sluggish in 2023, primarily due to low valuations and a reluctance among sellers to part with their assets at the time.
Caixa noted that several macroeconomic factors influenced this downturn, including high interest rates, geopolitical risks, regulatory issues, and uncertainty surrounding inflation and economic growth.
As central banks in Europe and the U.S. are likely to enter a cycle of interest rate cuts in the second half of this year, the depressed investment banking activity is anticipated to rebound. Lower funding costs should encourage investment activity, and the three major investment banks mentioned should reap the benefits.
Overall Performance and Valuation Comparison for 1Q2024
Beyond investment banking, Morgan Stanley, Goldman Sachs, and JPMorgan Chase also operate in other financial sectors, such as asset management, wealth management, market trading, and interest-based business.
JPMorgan Chase, in particular, has a more comprehensive business scope, functioning as both a commercial bank engaged in interest-based activities and an investment bank involved in investment banking and trading services.
During the Fed's interest rate hike cycle, U.S. commercial banks, including JPMorgan Chase, saw significant performance improvements due to widening interest rate differentials. In contrast, investment banks faced challenges due to the increased cost of capital.
As the interest rate gap between commercial banks narrows, traditional commercial bank interest income growth may slow, while asset-light businesses, such as investment banking, are expected to recover. JPMorgan Chase, with its diversified operations across commercial and investment banking, is well-positioned to mitigate cyclical risks.
Data indicates that JPMorgan's non-interest income is comparable to its net interest income, and its profitability surpasses that of its investment banking competitors, including Morgan Stanley and Goldman Sachs. This includes a $668 million attributable net profit from First Republic Bank, a regional bank that entered receivership in May 2023.
In terms of valuation, JPMorgan is positioned between Morgan Stanley and Goldman Sachs in terms of the share price to tangible book value ratio, reflecting a premium for its business strengths. However, it should be noted that JPMorgan's legendary CEO, Jamie Dimon, recently completed a transaction for 1 million shares of JPMorgan Chase, which might be perceived as a potential concern.
It is important to clarify that after this transaction, Jamie Dimon retains 7.6 million shares of JPMorgan Chase. The sale should be viewed as part of his personal financial management and not as a reflection of a lack of confidence in JPMorgan Chase's future prospects.
Summary of Investment Banking Performance in 1Q2024
In the first quarter of 2024, Goldman Sachs continues to exhibit significant strength in transaction advisory services, including mergers and acquisitions, dispositions, and spin-offs. Morgan Stanley demonstrates its unique competitiveness in the equity markets, while JPMorgan Chase, with its substantial advantage in commercial banking services, is expected to excel in bond underwriting.
As the interest rate cycle shifts, the investment banking business is poised for recovery. Given their considerable strengths and operational scale, the three major investment banks are anticipated to capitalize on this macroeconomic trend.
