Wall Street executives have a message for investors who were hoping for a third quarter surge in dealmaking profits: Wait until 2024.
Five big banks with sizable operations on Wall Street collectively reported a 2% drop in investment banking fees when compared to the same period a year ago, despite lots of talk last summer of "green shoots" in mergers, acquisitions, and IPOs. They now warn that it will likely take longer for any sustained gains to show up.
The biggest third quarter drop belonged to Morgan Stanley (MS), where investment banking revenue fell 27%. Investors punished the bank's stock Wednesday, sending it down nearly 7% for its worst day in more than three years.
These revenues were roughly flat at Goldman Sachs (GS) and down at JPMorgan (JPM). Only Citigroup (C) and Bank of America (BAC) reported year-over-year gains.
Morgan Stanley CEO James Gorman told analysts that his firm is "seeing increasing evidence of M&A and underwriting calendars that are building" but expects "most of the activity to materialize in 2024."
Gorman also admitted he "loved" a comment from one analyst that "for all the talk about green shoots, someone forgot to water them."
Even the banks that showed gains were reluctant to express a lot of enthusiasm or optimism. Bank of America CFO Alastair Borthwick said "we've grown tired of predicting" when investment banking will return to more historical levels of activity.
“We haven't yet seen that confidence return to the equity capital markets,” Borthwick added.
Citigroup CEO Jane Fraser said "it remains hard to predict when deal activity will sustainably rebound," adding that "I'm struck how consistently CEOs are less optimistic about 2024 than a few months ago."
The third quarter was supposed to be the time that Wall Street's drought would end, fueled by a series of public offerings that would finally break open an IPO logjam. Several companies did go public last month — including ARM, Instacart, Klaviyo, and Birkenstock — but some fell in price after their market debuts.
That mixed performance raised questions about whether other companies considering an IPO would follow. Those doubts intensified toward the end of the month amid higher borrowing costs, concerns about an extended period of high interest rates, volatility from geopolitical tensions, and new worries about the possibility of a recession.
Goldman — the lead banker on several of the IPOs in September — said its backlog of future deals went down during the quarter.
"The current levels in investment banking remain quite depressed" compared to 2019, "which is what you might consider the last normal year," said JPMorgan CFO Jeremy Barnum.
Some of these big banks are leaning more heavily on their trading desks as markets remain volatile. Those combined revenues were up roughly 1% at the five banks with sizable Wall Street units.
Equity trading at Bank of America rose 10% while Citigroup’s revenue from fixed-income trading jumped 12% from the year-ago period.
What most banks are waiting for is for the Federal Reserve to signal it is done raising interest rates. They say that will be the point that confidence will return for many of their big corporate customers.
When that happens, "the M&A and underwriting calendar will explode because there is enormous pent-up activity," Gorman said Wednesday. "I don't know if it's six months out or nine months out or it starts three months out, but this thing is going to start turning and rates will be the kick, when they start coming down."
“Unfortunately I’m not going to be around to enjoy it,” said Gorman, who announced in May that he would be leaving as CEO within one year.
David Hollerith is a senior reporter for Yahoo Finance covering banking and crypto.
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