Citigroup (C) CEO Jane Fraser didn’t mince words on Friday as she discussed the performance of her bank’s Wall Street side in the second quarter of 2023.
“The long-awaited rebound in investment banking hasn’t materialized,” she said in a press release, “making for a disappointing quarter.”
The first results from some of the country’s largest banks are in and a warning sign of a difficult week ahead for Wall Street.
Morgan Stanley (MS) and Goldman Sachs (GS), two of the world’s largest dealmakers, are expected to report on Tuesday and Wednesday. Bank of America (BAC), which has a large Wall Street branch, also reported on Tuesday. All are expected to see declines in investment banking and trading beginning in the first quarter.
Friday’s results showed that large banks like JPMorgan (JPM) and Wells Fargo (WFC), which have sizable consumer businesses, are performing well because of their ability to charge more on their loans and from an increase in the Credit card loans benefited by Americans still have money left over.
“The consumer is doing fine,” JPMorgan CEO Jamie Dimon told analysts. “They spend their excess money.”
However, Friday also showed that corporate customers are not providing as much lift, hurting banks that rely more on them.
CEOs remain cautious on everything from interest rate developments to relations with China to the larger US economy, dampening the optimism needed to buy other companies, go public or take on more debt.
Jane Fraser, CEO of Citigroup. (AP Photo/Jacquelyn Martin)
“Companies are quite cautious,” Fraser told analysts on Friday, citing the prospect of another rate hike by the Federal Reserve, tensions with China and concerns about limited economic growth.
“I think clients have been trying to understand and get a handle on both the macro and market outlook for some time. I think they now seem to be accepting that the current environment is the new normal and are starting to position themselves globally.”
The story goes on
That caution was most evident in the performance of Citigroup’s corporate and investment banking unit, which helped push the bank’s overall profits down 36%. Investment banking revenue fell 24% to $612 million in the second quarter.
It wasn’t just Citigroup, however. Even JPMorgan, which made huge profits in its retail banking business, saw its investment banking fees fall 6% year over year to $1.5 billion.
Trading, which was stronger earlier in the year, also weakened. Citigroup’s revenue from this deal fell 13%. JPMorgan’s earnings related to trading in equities and fixed income also fell.
“Most investors stayed on the sidelines in the second quarter,” Fraser said.
Solomon on trial
These results don’t bode well for Goldman or Morgan Stanley, whose revenues rely heavily on deals and trading.
Goldman is expected to see investment banking revenue decline 32% year over year and trade down 17%, according to analyst estimates.
That could draw the attention of CEO David Solomon, who is grappling with unrest among partners and concerns over strategy as he tries to launch the company with a consumer banking experiment.
David Solomon, CEO of Goldman Sachs. (Photo by Patrick T. FALLON/AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Goldman “is suggesting that the second quarter could collapse with major writedowns of some of these non-core businesses,” Ken Leon, research director for equity analysis at CFRA, told Yahoo Finance on Friday.
Therefore, the focus will be on Solomon and “if he can show the strategy that they have will work,” Leon said. “It’s going to be a difficult subject” for the CEO.
Analysts are also expecting Morgan Stanley to decline in some of its core businesses, with investment banking down 4% and trading down 19%.
‘We will see’
After a boom in 2021, the global deal slowdown began last year, prompting Wall Street firms to cut bonuses and staff. According to Dealogic, global investment banking revenues fell 52% year over year in the second quarter.
Citigroup, Morgan Stanley, Goldman and other companies with large investment banking and trading units have committed or announced about 12,000 job cuts since late 2022.
Some observers are still forecasting “green shoots” and pointing to an improvement in the second half of the second quarter.
JPMorgan CFO Jeremy Barnum said investment banking performed better than expected in June, but warned analysts on Friday that it was “too early” to call it a trend.
“We’ll see,” he said. For the overall capital markets, “July should be a good indicator for the rest of the year.”
Smaller banks could also face new challenges in the coming weeks due to the behavior of corporate customers.
That’s what happened on Friday. State Street (STT), which serves many institutional customers and was the country’s 12th largest bank as of March 31, is down 10% from the first quarter.
This is largely due to rising deposit rates and State Street customers moving away from interest-free deposits as they seek higher returns. The bank now expects net interest income to fall by 12 to 18 percent in the coming quarter.
The stock fell 12% on Friday.
“We found that our larger customers, and we primarily have large, discerning customers, are very actively considering their alternatives,” said Eric Aboaf, CFO of State Street. “That was accelerated by the speed of this cycle and the place we’ve arrived and the speed.”
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