The Resurgence of Investment Banking Drives Higher Bank Earnings in 2024

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By Cary Springfield, International Banker

Make no mistake: Investment banking is back. With the biggest banks reporting strong earnings for the second quarter on the whole, soaring investment-banking fees and a steep rise in dealmaking activity have invariably underpinned the income gains being posted. With bankers expressing distinct bullishness over the pipeline of deals in the offing, investment banking has rarely been in ruder health this decade.

In total, fees from the United States’ five largest investment banks—JPMorgan Chase, Bank of America (BofA), Citigroup, Morgan Stanley and Goldman Sachs—were recorded at $8.2 billion during the second quarter, a whopping 40-percent rise from a year earlier. Citigroup, JPMorgan and Wells Fargo also reported higher investment-banking revenues for the second quarter, at 60 percent, 46 percent and 38 percent, respectively, from the second-quarter (Q2) 2023 numbers. And while Goldman Sachs registered a hefty 21-percent growth in investment-banking revenue on an annual basis, this remained below the bank’s first-quarter (Q1) figures, as was the case for Citi and Wells Fargo. But besides Goldman, all banks reported investment-banking revenues that were higher than initially expected for the quarter, further underscoring the renewed strength of this business.

“We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income,” Wells Fargo’s chief executive officer, Charles Scharf, noted in a July 12 earnings call. “The investments we have been making [have] allowed us to take advantage of the market activity in the quarter with strong performance in investment advisory, trading and investment banking fees.” Those fees are typically earned by banks when deals are concluded, thus suggesting that investment-banking dealmaking is back on the up once more following the post-pandemic drought experienced by banks across the sector. Indeed, Bank of America’s annual revenue growth of 1 percent to $25.4 billion in Q2 has largely been attributed to growth in such fees, as well as higher sales and trading revenues.

Outside of the top five lenders, meanwhile, Lazard caught analysts’ attention as it swung back into profit in Q2, driven by a recovery in its core investment-banking business. Revenue from the 176-year-old investment-banking stalwart’s financial-advisory business was particularly strong, climbing by 17 percent to $411 million, whilst net revenue swelled by 38 percent to a record $855 million during the first half of the year, the bank confirmed. During this time, M&A (mergers and acquisitions) revenues rose by 8 percent in North America, according to data from Dealogic, with Lazard reportedly featuring in the top-advisory-league tables and earning the 10th highest fees across banks globally over the same six-month period.

Such growth marks a dramatic turnaround from 2023, when a multitude of issues weighed on the investment-banking business, which, according to Acuity Knowledge Partners, included geopolitical conflicts, market volatility, supply-chain bottlenecks, rising inflation, higher interest rates and changing financial regulations, resulting in fewer mergers and acquisitions and a dearth of equity capital market (ECM) and debt capital market (DCM) deals. “Global investment banking revenue stood at $50 billion in the first three quarters of 2023, 20 percent less than in the first three quarters of 2022,” Acuity, a research firm for the financial-services industry, noted in its “Investment Banking Outlook 2024” report.

“Against this challenging backdrop, investment banking firms were forced to implement measures to increase their operating efficiency and contain costs,” Acuity also observed, with actions such as evolving with the changing environment, adopting modern operating models, implementing new technologies in operations and building capabilities in-house all deemed necessary to remain competitive and boost productivity.

Such measures have been instrumental in raising expectations of a robust recovery in investment-banking revenues transpiring this year. Just prior to the release of the US banks’ second-quarter earnings, for instance, Moody’s Ratings confirmed that it anticipated stronger investment-banking results vis-à-vis one year earlier due to growth in debt underwriting, M&A business and higher trading volumes. “Debt issuance volume systemwide was higher than a year ago, with the largest increases in high yield,” Moody’s reported on July 9. “High-yield debt issuance volumes were up significantly from a year ago, building on momentum over the last 12 months that likely reflected tighter credit spreads, more clarity around monetary policy and a better-than-expected economic outlook.”

The Financial Times (FT) also recorded revenues from debt underwriting at the top five banks at $3.7 billion, a whopping 50 percent higher from one year earlier, with corporate borrowers now seeking to raise new funds or refinance existing debt amid stabilising borrowing costs and renewed confidence in the economic outlook, which is now bolstering investor appetite for deals. Citi and Morgan Stanley have been the biggest beneficiaries of this debt-deal resurgence, earning 90 percent and 70 percent more in fees, respectively. Total fees from debt deals have also surpassed fees from other investment-banking businesses.

M&A business is also enjoying a renaissance, with global deal volumes hitting $1.6 trillion in the first six months of the year, up 20 percent from a year earlier, according to Dealogic. That said, global M&A volumes remain below those of the deal frenzy that immediately surfaced during the pandemic, with the second quarters of 2021 and 2022 recording volumes of $1.5 trillion and $1.2 trillion, respectively, compared with the $800 billion notched up in Q2 2024.

JPMorgan Chase’s chief financial officer, Jeremy Barnum, recently acknowledged that while M&A is “robust”, it is still muted in terms of the number of deals, with the initial public offering (IPO) space remaining subdued due to the underperformance of a few sectors, such as mid-cap technology. “A lot of the private capital that was raised a couple of years ago was raised at pretty high valuations. So in some cases… (companies looking for) IPOs could be looking at down rounds,” Barnum added.

Nonetheless, banking leaders are sharing widespread bullishness regarding the prospects for investment banking and fee-based businesses over the coming months and years. “From what we’re seeing, we are in the early innings of a capital markets and M&A recovery,” Goldman Sachs’ chief executive officer, David Solomon, told analysts on a July 15 earnings call. One day later, Morgan Stanley’s chief financial officer, Sharon Yeshaya, echoed Solomon’s assessment by observing that, with buyers and sellers having begun to close the valuation gaps that were previously preventing dealmaking, “we expect that we are still in the early innings of an investment banking rebound”. The bank’s chief executive, Ted Pick, meanwhile, declared that “we’re in the early stages of a multi-year investment banking-led cycle” in an earnings call.

JPMorgan’s Barnum was also optimistic about the pipeline for mergers, acquisitions and equity-capital markets, although the CFO also expressed caution over debt-capital market activity in the second half of the year. “We are encouraged by some of the economic trends that underpinned client activity in the second quarter, and we remain cautiously optimistic as we head into the second half of the year,” Jennifer Piepszak and Troy Rohrbaugh, co-CEOs of JPMorgan’s Commercial and Investment Bank, remarked in a post-earnings memo seen by Reuters. The bank merged its commercial, corporate and investment banking businesses earlier this year under a larger global banking division.

Citi’s chief financial officer, Mark Mason, confirmed on a call following the release of the bank’s Q2 earnings that the pipeline of announced deals was looking strong and would most likely play out at the end of this year and into 2025. “There are a number of factors that come into play, including the broader regulatory environment, including elections, including how the rate environment and inflation continues to evolve,” Mason said. “But the important thing is we are well positioned as we look at announced deals. We are seeing some good momentum.”

According to Acuity’s “The Dealmakers Insight – Investment Banking Survey 2024” results, meanwhile, an increasingly positive mood is taking hold of investment banking and advisory businesses. The survey recorded a hefty 77 percent of respondents expecting “significant or at least marginal revenue growth” in 2024, while dealmakers are anticipating a buyer-led market. M&A is expected to be the leading contributor to overall investment-banking revenue, followed by debt-capital markets, equity-capital markets and private-capital advisory and placements.

“The TMT [technology, media and telecom] sector will likely remain the primary sector driving the recovery in revenue, followed by power, utilities and infrastructure and leisure, retail and consumer,” the survey also noted. “ESG is expected to be a main factor influencing private equity investment and M&A deals. With this expected growth, investment banks and advisory firms would need more bandwidth. Gap in bandwidth to be bridged by technology and offshoring.”

An M&A resurgence may also be supported by a second Donald Trump presidency, with banks expecting an easing of banking-sector regulation should Trump claim victory in November’s elections. Nonetheless, key downside risks remain. “While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks,” JPMorgan’s chief executive officer, Jamie Dimon, noted in a statement, adding that the risks included the volatile global geopolitical situation, which he previously described as potentially one of the most treacherous eras since World War II.

“Looking ahead, geopolitical uncertainty remains, but we continue to see a constructive environment for our business activity, especially as we shift to a world where central banks reduce rates,” Lazard’s chief executive officer, Peter Orszag, stated.