Morgan Stanley: "Wall Street Investment Banking Slump May Continue Until Next Year"

There is a warning that Wall Street's investment banking sector may not recover until next year. This is due to a sharp decline in initial public offerings (IPOs), bond issuances, and bond and stock trading caused by a contraction in the financial market, as well as lingering concerns stemming from the Silicon Valley Bank (SVB) crisis.

James Gorman, CEO of Morgan Stanley, stated during an earnings conference call on the 19th (local time) that mergers and acquisitions (M&A) and IPOs are "still very depressed." He explained, "There are new spring-like signals that M&A routes are increasing," but added, "most of this will happen in the second half of 2023 or in 2024." According to Dealogic, global IPO activity in the first quarter fell to its lowest level since the second quarter of 2020.

[Image source=Reuters Yonhap News]

Morgan Stanley's first-quarter earnings per share, released that day, exceeded market expectations at $1.70. Like the four major banks including JP Morgan Chase and Bank of America (BoA), Morgan Stanley posted results that surpassed expectations despite interest rate hikes and turmoil in the banking sector. First-quarter revenue was $14.52 billion, down 2%, but still above market forecasts of $13.97 billion.

However, investment banking revenue, including M&A fees, in the first quarter was $1.25 billion, down 24% from the same period last year. Trading revenue also shrank by 13%, confirming the recession concerns currently faced by Wall Street investment banks including Goldman Sachs.

This sluggishness in the investment banking sector is due to the financial market contraction caused by rapid interest rate hikes since last year, concerns over economic recession, and stock market uncertainty. Additionally, the impact of SVB's bankruptcy last month dealt a direct blow. JP Morgan Chase and Goldman Sachs, which released their earnings earlier, also recorded declines of 19% and 26% respectively in their investment banking divisions. CEO Gorman said, "Activity in the investment banking sector continues to be constrained."

During the conference call, CEO Gorman mentioned Morgan Stanley's significant strengthening of its asset management division through acquisitions of Eaton Vance and E*Trade, and also forecasted "more acquisitions." He added, "We have a list of what assets are attractive and a good fit," but emphasized, "We are not in a hurry." Morgan Stanley's asset management division posted an 11% increase in revenue in the first quarter.

Morgan Stanley's deposits shrank by 3% from $350.6 billion last quarter to $340.9 billion in the first quarter. Sharon Yeshaya, Morgan Stanley's Chief Financial Officer (CFO), explained, "The SVB bankruptcy triggered deposits moving into money market funds and U.S. Treasury securities, but most assets still remain in banks." Provisions for potential losses increased fourfold from $57 million a year ago to $234 million. The bank confirmed that this reflects concerns over commercial real estate and macroeconomic outlooks.

Concerns over the commercial real estate market have persisted since the SVB incident. According to a global fund manager survey conducted by Bank of America (BoA) in April, 48% of respondents feared that problems arising in the U.S. and European commercial real estate markets could trigger a widespread credit crisis in the future. Tail risks cited included credit tightening and recession concerns amid high inflation. The day before, Moody's warned that as the U.S. economy enters a mild recession in the second half of the year, the default rate could rise to 5.4% by year-end. Jamie Dimon, chairman of JP Morgan Chase, known as the "Emperor of Wall Street," also stated right after last week's earnings announcement that "there is a need to prepare for the risk of higher interest rates persisting for a long time."

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