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Investment banking slowdown set to hit Goldman Sachs and Morgan Stanley results this week

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Goldman Sachs and Morgan Stanley will likely report another slowdown in profit on Wednesday and Tuesday respectively amid a continued slump in global dealmaking.

Analysts at JP Morgan reduced their earnings per share estimates for Goldman Sachs and Morgan Stanley on “lower IB revenues…with limited cost offset”.

The analysts cut Goldman Sachs’s EPS for the full year by 14 per cent and Morgan Stanley’s by 12 per cent.

“We expect the focus of 2Q results for US IBs to be on the outlook for IB fees, planned cost measures in the event of continued revenue weakness and the outlook for capital returns with Basel 3 finalisation uncertainty,” the analysts said.

2022 was a very difficult year for investment banks with political and economic volatility leading to a slump in dealmaking. Things so far haven’t got much easier in 2023. Overall global M&A value is down 44 per cent in the first five months of 2023.

The banks will also have been paying close attention to Citi’s results at the end of last week.

Citi saw its profit fall 36 per cent year on year as it was hit by the global decline in dealmaking. Revenue from corporate and investment banking fell 44 per cent compared to last year while revenue from its trading business also fell 13 per cent.

Citi boss Jane Fraser noted “the long-awaited rebound in investment banking has yet to materialise, making for a disappointing quarter.”

The two Wall Street giants, who traditionally make most of their revenue from investment banking, will report alongside Bank of America, which will likely follow the example of JP Morgan and Wells Fargo.

Rising interest rates continued to be a strong tailwind for JP Morgan and Wells Fargo with both banks performing ahead of expectations

JP Morgan recorded net income of $14.5bn, 67 per cent higher than last year, while Wells Fargo’s climbed 57 per cent to $4.9bn. Both performances were driven by substantially higher net interest income, with both banks raising their outlook for full year interest income.

Bank of America’s revenue is expected to grow by 10 per cent to $25bn with an EPS of $0.84 in the second quarter.