US IBs Hit Hard by High Interest Rates and Deal Drought, Earnings Plummet

Poor Sales Performance in Corporate Finance Division of the Three Major Investment Banks

The three major U.S. investment banks (IBs) all reported disappointing results in their corporate finance divisions, which were hit hard by high interest rates.

On the 18th (local time), Morgan Stanley announced in its earnings report that its third-quarter net profit was $2.408 billion (approximately 3.27 trillion KRW), down 9% from the same period last year. During the same period, revenue increased by 2% to $13.273 billion, compared to $12.986 billion in the previous year.

The decline in net profit stemmed from deteriorating performance in its core IB division. Revenue in the IB division for the same period was $938 million, down 27% from $1.277 billion in the previous year. Within the IB division, revenue related to corporate mergers and acquisitions (M&A) advisory fees plummeted by more than 30%.

James Gorman, CEO of Morgan Stanley, said, "It is unusual for IB division revenue to fall below $1 billion," adding, "The banking industry is in a vulnerable situation."

JP Morgan Chase, which announced its results a day earlier, also saw its IB division revenue decline by 3% compared to the same period last year. Goldman Sachs’ third-quarter IB division revenue was $1.554 billion, marking only a 1% increase year-over-year, essentially stagnating. Cumulative revenue through the third quarter this year was $4.564 billion, down 17% from the previous year.

The Wall Street Journal (WSJ) analyzed that the poor performance of U.S. IBs was due to the Federal Reserve’s prolonged high interest rate policy and recession concerns, which weakened markets for corporate M&A, initial public offerings (IPOs), and bond issuance. According to U.S. financial data firm Dealogic, the total global M&A transaction value for the third quarter cumulative period decreased by 28% compared to the same period last year.

Stocks also plunged due to the weaker-than-expected earnings. On the day, Morgan Stanley’s stock price fell nearly 7% at closing, marking the largest single-day drop in nearly three years since June 2020. Goldman Sachs’ stock also closed at $301.96, down 2.4%, hitting its lowest level in the past year.

Investment banks expect IB performance to vary depending on whether the Fed signals a pause in interest rate hikes. Goldman Sachs stated, "When the Fed enters the late phase of tightening and signals a retreat from its tightening stance, conditions in the IB division will begin to change," adding, "We expect earnings to recover starting next year."

This content was produced with the assistance of AI translation services.