Investment Banking Not Dead, Just Resting

On Friday, on the firm’s Q3 conference call, Morgan Stanley’s James Gorman described himself as “pretty relaxed in aggregate.”

It’s a bit difficult to imagine someone who’s any sort of relaxed communicating their relative serenity by employing the phrase “in aggregate,” but I suppose we can give him the benefit of the doubt.

Gorman alluded to possible job cuts, and conceded that the environment is “difficult.” CFO Sharon Yeshaya used similar language while describing the bank’s results as “strong and stable.”

I don’t dispute the “stable” part. I might quibble with the “strong” characterization, though. Markets likewise. The shares were under pressure Friday.

IB was rough. I should emphasize, unequivocally, that big declines were a foregone conclusion. This is, as Gorman and Yeshaya described it, a “difficult” environment.

Nevertheless, there’s a kind of unspoken expectation that when the bar is low, it should be cleared. JPMorgan’s IB results were materially better than expected, for example. Although Morgan did top estimates in IB, it was by a slimmer margin. Revenue of $1.277 billion eked past consensus, which was looking for $1.22 billion.

Although it was a better result than Q2, fixed income underwriting barely improved from the prior quarter. The bank called the YoY drop in equity volumes “substantial” and blamed “macroeconomic conditions” for the lower issuance which undercut fixed income.

The comp was very challenging. Q3 of 2021 was a record for IB at Morgan. Equity underwriting dropped almost 79% on a YoY basis, while advisory basically halved.

There’s a lot going on at the bank. The firm is, of course, knee-deep in the Musk-Twitter saga, and I don’t think it’s unfair to suggest the commitments could be an albatross going forward given the difficulty banks are having unloading LBO financing. In addition, the bank has personnel issues on the equity syndicate desk, which is being scrutinized for its handling of block trades.

“Advisory and underwriting activity hasn’t gone away, it’s simply been deferred,” Gorman said Friday, adding that there are no “areas of obvious concern.” Both the fixed income and equities businesses “navigated complicated markets without serious incidents.” Yeshaya basically echoed that. IG issuers, she said, “fared better,” taking advantage of “favorable windows.”

You might recall that high-grade issuance fell woefully short of expectations in the normally bustling month of September (figure above).

Morgan’s trading results were ok. FICC held up, as revenue rose 33% to $2.18 billion, ahead of estimates ($1.97 billion) and the highest for any Q3 in at least 10 years. “Macro revenue increased meaningfully versus the prior period [as] inflationary pressure and [policy] activity drove volatility higher,” Yeshaya remarked, on the call. “By extension, changes in portfolios supported client engagement and increased flow trading activity, benefiting rates and foreign exchange.”

But equities revenue of $2.46 billion was down 14%, and missed consensus. The bank, somewhat tautologically, cited lower client activity. Overall, trading revenue of $4.46 billion was a slight miss.

Net interest income beat, comp costs were lower than anticipated and wealth management revenue matched estimates, but panning all the way out, the bank missed on both the top and bottom lines. Revenue of $13 billion was short of the $13.3 billion consensus expected, and EPS of $1.47 was likewise a small miss.

Meanwhile, at Citi, IB revenue dove 64% YoY (figure below), results out Friday showed. Advisory fees managed a beat, but the overall IB miss was quite large. Bloomberg consensus was for $1.07 billion. Citi managed just $631 million.

“Heightened volatility and macro uncertainty continue to impact client activity across M&A and capital markets,” the bank remarked.

Fortunately, Citi’s retail operations saved the quarter. The bank actually topped estimates on both the top and bottom lines. It’s also winding down its presence in Russia entirely. “We will be ending nearly all of the institutional banking services we offer next quarter,” Jane Fraser said, of Vladimir Putin’s pariah state. (She didn’t use the word “pariah.”)

In any event, one key takeaway from Friday’s big bank earnings was that IB is mired in a significant downturn. Again, that’s hardly surprising, but it’s notable. It’s a trend. An explainable trend, but a trend all the same.

On Morgan Stanley’s call, BofA’s Ebrahim Poonawala kicked off the Q&A with an impossibly broad question, which eventually engendered Gorman’s “pretty relaxed, in aggregate” assessment mentioned here at the outset. On the way there, Gorman reiterated that dealmaking isn’t dead, only deferred. “People don’t stop doing deals,” he told Poonawala. “In fact, there was a deal announced this morning.”

It’s not dead. It’s just resting.