After executives at major US investment banks set low revenue expectations in September, Q3 investment banking fees showed stronger than expected growth, driven largely by increased activity in the debt capital markets.
Altogether, JPMorgan, Goldman Sachs, CitiGroup, Wells Fargo, and Bank of America generated around $7.2 billion in investment banking fees in Q3, growing 30% on average compared to last year.
Meanwhile at Morgan Stanley, fees from investment banking jumped 56%, the largest growth recorded among the major banks reaching nearly $1.4 billion.
"I'm bullish on IPOs and M&A coming back," Morgan Stanley CEO Ted Pick told analysts on a recent conference call. "It may take some time, [but] the size of the companies when they come will be likely larger."
Goldman's CFO Denis Coleman recently said on a call with analysts that "we are seeing increased client demand for committed acquisition financing which we expect to continue on the back of increasing M&A activity." Though he also noted a slowdown in M&A activity amongst large companies due to regulatory challenges.
Unlike M&A, the turnaround times for debt and equity issuance deals are much shorter, and the size of these deals is much more influenced by capital market conditions. These factors can help explain why banks set expectations low at the beginning of the month because there may have been greater uncertainty about the size and number of deals in their pipeline.
However, following the Fed’s mid-September announcement of lower interest rates, companies have moved quickly to capitalize on more favorable borrowing conditions and improved market valuations. This has resulted in a surge in issuance activity and higher-than-expected fees for investment bankers.
The latest investment banking results also reflect “a combination of pent-up demand as companies postponed actions during the Fed’s hiking cycle,” and higher confidence that the economy will avoid a recession, “which was assumed to be short and mild even if there was one,” Chris Wolfe, head of North American banks for Fitch Ratings told Barron’s.
In Q3 2024, JPMorgan reported investment banking fees of $2.23 billion, a 31% YoY increase. This growth, driven by “higher fees across all product categories” the earnings report notes, surpassed the bank’s previous guidance of 15% growth earlier in September.
“In light of the positive momentum throughout the year, we’re optimistic about our pipeline for mergers and acquisitions,” CFO Jeremy Barnum told analysts.
Fees at Goldman Sachs jumped 20% to $1.87 billion driven by leveraged finance and investment-grade activity, and equity underwriting.
Bank of America’s fees grew 18% to $1.4 billion, after setting expectations for revenues to remain flat earlier in September. Meanwhile, M&A fees beat analyst predictions but were down 14% at $387 million from a year earlier.
CitiGroup fees grew 44% to $999 million while fees at Wells Fargo fees grew 37% to $672 million.
Despite the optimism, dealmakers are closely monitoring a variety of potentially impactful variables: the US elections and its impact on taxes, trade, regulations, and the economy, the Fed’s plans for interest rates and what they say about the economic outlook, and the conflicts in the Middle East and Eastern Europe.
At the same time, despite a growing number of larger transactions throughout the year supporting high deal volumes, M&A activity in the upper and middle markets has only modestly improved after 2023.
"In light of the positive momentum throughout the year, we're optimistic about our pipeline, but the M&A regulatory environment and geopolitical situation are continued sources of uncertainty," said JPMorgan's finance chief Jeremy Barnum.
“It’s not peak capital market activity,” added Morgan Stanley’s CFO Sharon Yeshaya. “Asset prices are up, there’s some volatility in the market, but investment banking revenues . . . are not yet at their peak. We still have more to go as we go through this capital market recovery.”
