Title: Major Wall Street Banks Brace for Rough Quarter as Investment Banking Slumps
Subtitle: Citigroup CEO expresses disappointment; Goldman Sachs, Morgan Stanley, and Bank of America to report declines
By Yahoo Finance Staff
July 10, 2023
Citigroup (C) CEO Jane Fraser recently expressed her disappointment with the performance of the Wall Street side of the bank during the second quarter of 2023. Fraser stated, “The long-awaited rebound in investment banking has yet to materialize,” making it a disappointing quarter for the bank.
As early results roll in from some of the nation’s largest banks, warning signs of a challenging week ahead for Wall Street are starting to emerge. Banks such as Morgan Stanley (MS) and Goldman Sachs (GS), renowned dealmakers, are scheduled to report their financial results on Tuesday and Wednesday, while Bank of America (BAC) will also release its report on Tuesday. They are all expected to show declines in investment banking and trading compared to the first quarter.
The results released on Friday demonstrated that banks like JPMorgan (JPM) and Wells Fargo (WFC), with extensive consumer franchises, are performing well due to their ability to charge higher interest rates on loans and from increased credit card borrowing by financially stable Americans.
JPMorgan CEO Jamie Dimon emphasized that “the consumer is in good shape” and that they are spending down their excess cash. However, the performance of corporate clients has not been as promising, negatively impacting banks that heavily rely on them.
CEOs across major banks remain cautious, citing concerns about various factors such as interest rates, U.S. economic growth, and tensions with China. This caution hampers the optimism required for mergers and acquisitions, initial public offerings, and taking on more debt.
Citigroup CEO Jane Fraser explained that corporates are displaying hesitancy due to factors like a potential Federal Reserve interest rate hike, trade tensions with China, and limited economic growth. Fraser noted that clients have been analyzing the macro and market outlook for a while and appear to be accepting the current environment as the new normal.
Citigroup’s corporate and investment banking unit reported a disappointing performance, leading to a 36% decrease in overall profits for the bank. Investment banking revenue also dropped by 24% in the second quarter, amounting to $612 million.
The decline was not exclusive to Citigroup, as JPMorgan also experienced a 6% decrease in investment banking fees compared to the previous year, amounting to $1.5 billion. The trading sector, which performed strongly earlier in the year, also faced setbacks, with revenue falling by 13% at Citigroup and JPMorgan.
Looking ahead, the results from Goldman Sachs and Morgan Stanley are anticipated to reflect a similar decline in their investment banking revenues. Analysts estimate a 32% decrease for Goldman Sachs and a 17% decline in trading revenue. These results could intensify scrutiny on Goldman Sachs CEO David Solomon, who has been navigating partner unrest and concerns about the organization’s strategy.
Another major player, Morgan Stanley, is also expected to report a decline in its core businesses, with a 4% drop in investment banking and a 19% decline in trading revenue.
The slowdown in global dealmaking, which began in 2022 after a boom year in 2021, is a contributing factor to the challenges faced by banks across Wall Street. Investment banking revenues for the second quarter declined 52% compared to the previous year, according to Dealogic.
Major banks, including Citigroup, Morgan Stanley, and Goldman Sachs, have already announced significant job cuts totaling around 12,000 since the end of 2022, as they adjust to this market environment.
While some experts predict potential improvements during the latter half of the second quarter, uncertainty remains. JPMorgan Chief Financial Officer Jeremy Barnum stated that it was “too early” to label the performance a trend and that July would provide a better indication of the capital markets’ outlook for the remainder of the year.
Smaller banks may also face challenges posed by the behavior of corporate clients in the coming weeks. State Street (STT), which primarily serves institutional clients and was the 12th largest US bank as of March 31, witnessed a 10% decline in net interest income compared to the first quarter. Rising deposit rates and clients seeking higher yields contributed to this decrease, prompting the bank to anticipate a further 12%-18% net interest income decline in the coming quarter.
Stocks of State Street plummeted by 12% on Friday, illustrating the impact of changing client behaviors on financial institutions.
As major banks report their second-quarter results, the market will closely watch their performance and the strategies outlined by CEOs like David Solomon of Goldman Sachs. The industry will anticipate signs of improvement and stability in investment banking and trading to safeguard against potential headwinds in the coming months.
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