Wall Street banks face deal slowdown amid market jitters
Wall Street’s investment banking and trading stalwarts reported mixed third-quarter earnings as both equity and bond markets faced turbulence due to the ongoing Iran war, escalating inflation, and concerns regarding substantial expenditures in the AI buildout. The results from JPMorgan, Citigroup, Goldman Sachs, and Wells Fargo indicate that the dealmaking and trading boom, which fuelled record earnings in the first half, may be experiencing a slowdown. Executives noted that a challenging bond market and volatility in equities have impacted activity, especially toward the end of September. Nonetheless, the third quarter exhibited robust dealmaking activity, supported by a strong pipeline, as executives noted that consumers, commercial borrowers, and the overall economy are in a favourable position.
“The economy continues to be very, very resilient despite some of the headwinds,” Goldman CEO David Solomon said on an analyst call. “We have an extraordinary tech supercycle. I think we have a regulatory environment that is really encouraging strategic activity … I think it’s a pretty good environment.” A prolonged bond market sell-off, which has driven yields around the world to multi-decade highs and put further pressure on stock market valuations, has interrupted dealmaking. The IPO market has lost steam in recent weeks, threatening what could have been a banner year for that business. JPMorgan specifically noted that market volatility and the ambiguous economic outlook have hindered dealmaking and diminished bond-market trading in recent months. However, its chief financial officer, Jeremy Barnum, informed reporters that the deals pipeline continues to be “very strong.” During periods of market turmoil, the disparity between buyers and sellers may expand temporarily; however, for the majority, transactions have been postponed rather than abandoned, he continued.
Analysts have similarly indicated that the IPO market remains selective rather than completely closed, with the potential for delayed offerings to proceed if conditions improve in the fourth quarter, a view supported by Solomon. “You might choose to wait, but the IPO market is still in pretty good shape,” Solomon said. Citigroup CFO Gonzalo Luchetti indicated that the bank experienced a decline in investment banking activity during the third quarter. Similarly, Wells Fargo CFO Mike Santomassimo highlighted a slowdown in September, mentioning in a call with reporters that the significant increase in the benchmark 10-year yield has had an impact. “There is no doubt that high interest rates and the threat of continued Fed hikes is weighing on trading and IB activity in a measurably negative vector,” said Brian Mulberry. Despite the increase in prices and borrowing costs, both consumers and corporate borrowers continue to exhibit resilience, with minimal decline in credit quality, according to executives from JPMorgan and Wells Fargo. “We’re just not seeing anything that would imply that there’s stress,” said Santomassimo.
Banks also experienced robust trading in equities, as clients adjusted their portfolios in response to rate uncertainty and rising energy prices. JPMorgan reported that revenue in its markets division increased by 15 percent in the third quarter compared to the previous year, with equity markets revenue experiencing a substantial rise of 49 percent. Goldman exceeded third-quarter profit expectations, driven by volatile markets associated with the West Asia conflict, which bolstered its equities revenue. However, its revenue from fixed income, currency, and commodities experienced a decline of 1 percent compared to the same period last year. Shares exhibited a mixed performance following the results, as Wells Fargo and Citigroup experienced declines, whereas JPMorgan and Goldman Sachs saw increases. “Our main concern with this and with other bulge bracket firms remains how much of the ‘beats’ seem concentrated in the equities trading business and how sustainable they will prove,” said Chris Kotowski in a note.
