Plummeting i-bank revenue still searching for a bottom

Freefalling investment banking fees at the largest institutions may not have hit bottom.

A sharp decline in M&A and capital markets issuance activity led to a 53.0% year-over-year drop in the combined fourth-quarter 2022 total investment banking revenue at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley.

In recent earnings conference calls, executives at the companies touted their backlogs of potential deal assignments, but getting those transactions executed is contingent on market conditions and confidence in the economic outlook.

"As we look into 2023, it's possible that the actual economic environment will be worse than it was in 2022," JPMorgan CFO Jeremy Barnum said in his company's earnings conference call.

Markets were far from stable in 2022 as the S&P 500 recorded its worst total return since the Great Recession with a negative 18.1%, and the Federal Reserve hiked interest rates by 425 basis points since March 2022. Barnum said the rapid changes in rates and valuations made executing M&A deals and capital markets transactions challenging in 2022, a year in which JPMorgan's total advisory and underwriting revenue fell 48.1% year over year to $6.93 billion. The largest drop was in the equity capital markets business, which was down 73.8% year over year to $1.03 billion.

If market stability returns and those involved in deals get more comfortable with valuations, that could help investment banking business in 2023, Barnum said. He called his company's pipeline "relatively robust," but when an equity research analyst asked for additional color about the investment banking business backlog, Barnum added, "It's not as if we're super optimistic."

Citi executives provided a similar outlook on investment banking. "While the pipeline looks more promising and the client sentiment is improving, it would be hard to precisely predict when the tide will turn in '23," CEO Jane Fraser said during the company's earnings conference call.

Goldman Sachs Chairman and CEO David Solomon said he expects investment banking results to improve meaningfully in the back half of 2023. He said the market still needs to adjust to lower asset prices and sellers are always hesitant to pull the trigger on a deal soon after their equity prices fall.

"If somebody had a stock that was trading at $100 and the stock goes down by 30%, certainly, for the next couple of quarters, they're still thinking about $100," Solomon said in the Goldman earnings call.

It can take four to six quarters before companies start considering financing or M&A transactions at the reduced valuations, Solomon added. He believes the market is roughly four quarters into accepting "the reset" on prices.

"We're well into that journey of a reset in expectations," Solomon said. "I think it might have another quarter or two to further reset, but I think we're starting to see some additional improvements."

Goldman Sachs has noticed positive signs, such as investment-grade markets having a strong start to 2023 in the U.S. and Europe. The company's overall deal backlog fell from the third quarter, but it "remained solid, particularly in advisory," Goldman CFO Denis Coleman said.

In the fourth quarter, Goldman benefited from an acceleration in deal closings that helped advisory revenue jump 44.9% quarter over quarter to $1.41 billion. Among the five investment banks, Goldman Sachs' advisory business held up the most, with revenue falling 13.7% year over year in the fourth quarter compared to a group aggregate average decline of 36.4%.

Bank of America reported the smallest year-over-year percentage drop in total 2022 investment banking revenue compared to the other four businesses, but the metric still fell 45.0% to $5.02 billion. Bank of America Chairman and CEO Brian Moynihan said his company has been building out its roster of commercial bankers, which is helping the investment banking business deepen and expand client relationships.

Citi had the roughest year in the group, recording the largest year-over-year investment banking revenue drop, with the total falling 53.1% to $3.11 billion. Citi had regularly been generating more than $1 billion in revenue per quarter from the investment banking businesses, but it has now fallen below that mark for three straight periods with the fourth quarter finishing at $645 million. During the earnings call, CFO Mark Mason said the investment bank had maintained its market position during 2022, but the company lost share.

"We expect investment banking to begin to rebound as the macroeconomic backdrop becomes more conducive to client activity," Mason said.

The Federal Reserve has the potential to serve as a catalyst to dealmaking, Morgan Stanley Chairman and CEO James Gorman said in his company's earnings conference call. "I am highly confident that when the Fed pauses [rate hikes], deal activity and underwriting activity will go up," Gorman said.

It is difficult to predict when the Fed will pivot from its monetary policy, however. It's also becoming more difficult to predict when deal plans will turn into actual deals, Morgan Stanley CFO Sharon Yeshaya said during the call.

"If we think about the investment banking pipeline, the pipeline itself isn't what's changed," Yeshaya said. "What's changed is that movement from the pipeline to realized."