Wall Street Soars on M&A Boom... "30% Earnings Growth"

Impact of High Interest Rates Led to Cooling of M&A Last Year
Strong US Economy and Increased Risk Appetite Drive Recovery
Expansion of Defaults Remains a Variable

This week, the earnings season for Wall Street investment banks, which opens the U.S. second quarter earnings season, is expected to show significant improvement. This is due to increased interest income from high interest rates and the revival of the mergers and acquisitions (M&A) market, which had experienced a two-year slump.

According to Bloomberg data cited by major foreign media on the 7th (local time), the second-quarter earnings of JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America (BoA), and Citibank are estimated to increase by an average of 30% compared to the previous year. Earlier, JP Morgan had forecasted to investors last month that its investment banking earnings could grow by up to 30%. Jefferies reported that investment banking revenue grew about 60% year-on-year over the three months ending in late May.

[Image source=Reuters Yonhap News]

The revival of the M&A market is cited as the cause of this earnings improvement. The M&A market, which boomed in 2021 and 2022 due to low interest rates and quantitative easing caused by the COVID-19 pandemic, had driven investment banks' revenues to record levels. However, it quickly cooled down as central banks worldwide entered a tightening cycle. Experts diagnose that recently, investment banking transactions have become active again as the solid U.S. economy is confirmed by indicators and investors' risk appetite increases.

Major deals completed in the second quarter include ExxonMobil's acquisition of competitor Pioneer Natural Resources for $60 billion (about 80 trillion won) in May. This M&A was brokered by Goldman Sachs, Morgan Stanley, and Citigroup. In April, under the leadership of Citibank and BoA, insurance broker Aon acquired competitor NFP for $13 billion (about 18 trillion won).

Betsy Graseck, a Morgan Stanley bank analyst, said, "Capital market activity is still below the normal trend line compared to the peak period," but added, "However, it has entered an upward trend, and this tailwind is expected to continue through this year and into next year."

However, the expansion of defaults due to prolonged high interest rates remains a variable. Earlier, 31 major U.S. banks including JP Morgan and Goldman Sachs passed the Federal Reserve's stress tests, proving they have solid finances capable of withstanding a severe recession. However, losses due to increased credit card balances and delinquency rates have emerged as weaknesses. Industry experts expect the four largest U.S. banks by deposit size?JP Morgan, BoA, Citibank, and Wells Fargo?to report more than $7 billion (about 9.6 trillion won) in loan loss provisions (losses on loans deemed uncollectible) in the second quarter. This is more than a 50% increase compared to last year.

Scott Sifers, a Piper Sandler bank analyst, pointed out, "The situation is in a normalization phase rather than significantly worsening," but noted, "Almost all investment banks on the planet are extremely concentrated in commercial real estate." Earlier, The New York Times (NYT) reported, "Wall Street banks including Goldman Sachs have begun quietly disposing of their non-performing commercial real estate loans out of concern that they will not be able to recover the loans," adding, "This signals widespread problems in the U.S. commercial real estate market."

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