NEW YORK, Jan 17 (Reuters) – Wall Street banks saw deep declines in investment banking business in the fourth quarter, prompting thousands of job cuts, but executives are looking for signs that CEOs companies are regaining confidence to resume transactions.
Morgan Stanley (MS.N) and Goldman Sachs (GS.N) reported falling fourth-quarter profits on Tuesday as Wall Street traders handling mergers, acquisitions and IPOs faced a backlash. sharp decline in their business in 2022. Rising interest rates Markets crashed last year and global investment banking revenues fell more than 50% from the previous quarter, according to data from analyst firm Dealogic.
Banks are waiting for a peak in the US Federal Reserve’s aggressive rate hike to restore confidence in corporate boards, as well as a reduction in sharp market price swings.
“I’m very confident that when the Fed takes a break (rate hikes), deal activity and underwriting activity will pick up,” Morgan Stanley CEO James Gorman said on the earnings call. form the bank.
Morgan Stanley Chief Financial Officer Sharon Yeshaya said she expects the deal pipeline to be more active when there is a “political pivot of peak inflation, something that allows CEOs who actually have these conversations in boardrooms to have more confidence”.
She said CEOs are also looking for “price clarity and valuation certainty.”
The fall of the investment bank has led to heavy job cuts, with Goldman Sachs laying off more than 3,000 employees in its biggest round of job cuts since the 2008 financial crisis, while Morgan Stanley has cut about 1,600. In total, global banks are cutting more than 6,000 jobs.
“CEOs and boards tell me they are being cautious, especially in the short term,” said Goldman Sachs chief executive David Solomon, who said there was an adjustment period for the return of investment banking, as investors or CEOs readjust their views on valuations after market slides.
“It takes a while for people to adjust,” Solomon said, adding that his experience was “4 to 6 quarters.”
Solomon also said the first sign to look for would be in the investment-grade debt market.
He expects the ‘second half of 2023’ to be ‘significantly better’, Solomon said, adding that he was heading to Davos where he saw comments that people were looking for a soft landing for the economy .
The annual meeting of the World Economic Forum in Davos takes place this week. Two-thirds of chief private and public sector economists polled by the WEF expect a global recession this year.
Top bankers recently told Reuters they expect mergers and acquisitions to pick up in the second half of 2023. Big investors are sitting on piles of cash preparing to fund deals, and big companies making strong profits seek to diversify their activities, but they expect economic growth. uncertainty to fade away.
If the markets recover, Goldman’s investment bankers have everything to gain. The company has been the world’s top M&A adviser by revenue for the past 20 years, followed by JPMorgan, according to Dealogic data.
SIGNIFICANTLY DOWN
Overall, investment banking fees were significantly lower.
Morgan Stanley’s investment banking revenue fell 49% in the fourth quarter, while Goldman Sachs’ investment banking fees fell 48%.
JPMorgan’s investment banking unit saw revenue drop 57%, Citigroup Inc’s (CN) investment banking revenue fell 58% while Bank of America Corp (BAC.N) fell by more than half. Investment bank Jefferies Financial Group (JEF.N) fell 52.5%.
That fueled a poor quarter overall, which saw the six biggest lenders, JPMorgan, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs, report profits ranging from 6% to 69%. Strength in trade helped offset a slump in investment banking, while interest rate hikes by the US Federal Reserve supported earnings.
Goldman shares fell 7.5% on Wednesday, although Morgan Stanley rose 6.7% as its earnings beat expectations on the strength of its wealth management and trading businesses.
These six have amassed about $6 billion in combined reserves to prepare for downgraded loans, compared to average projections of $5.7 billion by Refinitiv. JPM set aside $1.4 billion, Wells Fargo $957 million, Bank of America $1.1 billion, Citi $640 million, Morgan Stanley increased its provision for credit losses to $87 million while Goldman Sachs’ provision for credit losses was $972 million.
Additional reporting by Manya Saini, Niket Nishant, Noor Zainab Hussain and Mehnaz Yasmin in Bengaluru; Written by Megan Davies; Editing by Aurora Ellis
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