'Much improved' investment-banking revenue awaits big Wall Street banks: Moodys
By Steve Gelsi
High-yield debt and equity follow-on deals expected to help investment banking revenue
A three-year high in equity follow-on issuance as well as spikes in leveraged loans, high-yield bonds and investment-grade loan issuance may fuel an expected rise in investment banking revenue at the largest U.S. banks, Moody's said Wednesday.
JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) may report "significant improvements" in investment banking revenue in the first quarter, according to the debt-rating agency.
Earnings updates for the three months ended March 31 begin Friday with JPMorgan Chase, Citigroup and Wells Fargo, followed by Bank of America, Goldman Sachs and Morgan Stanley on Tuesday.
Also read: JPMorgan, Wells Fargo, Citi first-quarter profit expected to be flat as interest rates rise and loan activity lags
While volumes of initial public offerings and mergers and acquisitions in the quarter remained weak, debt issuance volume led by high-yield deals was higher than in the year-ago quarter.
While interest rates remained high in the first quarter, the period marked a relative period of stability that fostered debt issuance, Moody's said. It was only the second quarter since early 2022 that saw the Fed keep rates unchanged at 5.25% to 5.5%.
"High-yield debt issuance volumes were up from a year ago, building on momentum gained last year that likely reflected tighter credit spreads, more clarity around monetary policy and a better-than-expected economic outlook," Moody's said.
To be sure, the optimism in the first quarter over rate cuts and an improving economy has since given way to worries about inflation in the second quarter.
JPMorgan Chase Chief Executive Jamie Dimon said this week in his annual letter to shareholders that it's possible interest rates could climb as high as 8% due to geopolitical risk.
Also read: Interest rates could hit 8% or more and wars are creating outsize geopolitical risks, Jamie Dimon warns
All told, high-yield bond issuance by the six megabanks jumped to nearly $100 billion in the first quarter from less than $60 billion in the year-ago quarter and about $50 billion in the fourth quarter of 2023, according to data from Moody's and Dealogic. It was the highest total since the third quarter of 2021.
Leveraged-loan issuance set a record of more than $350 billion via 600-plus deals in the first quarter, up sharply $100 billion in the year-ago quarter and more than double the $150 billion in the fourth quarter.
First-quarter investment-grade bond issuance topped $500 billion for the first time since the third quarter of 2020, the data showed.
Equity follow-on issuance surged to a three-year high of about $60 billion, up from about $20 billion in the year-ago quarter and less than $40 billion from the previous quarter.
Fixed income, currencies and commodities (FICC) trading revenue is expected to be lower from the year-ago quarter, but trading volume in credit exchange-traded funds (ETFs) and FICC options and futures products was up from the year-ago period.
Among other key data points, IPO activity remained at multi-year lows and was flat over the year-ago quarter and from the previous quarter.
M&A deal completions remained flat with the year-ago quarter, and were down from the strong second half of 2023. However, the average deal sizeincreased and could lift advisory revenue for the big banks.
Meanwhile, the pricing of bank debt from Citi, JPMorgan and Wells Fargo turned up toward the end of the quarter after remaining relatively stable since the start of the year.
Also read: S&P issues negative outlook on five U.S. regional banks due to risky office space exposure
-Steve Gelsi
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04-10-24 1239ET
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