Citigroup (C) CEO Jane Fraser did not mince words on Friday when discussing how the Wall Street side of her bank performed during the second quarter of 2023.
"The long-awaited rebound in investment banking has yet to materialize," she said in a release, "making for a disappointing quarter."
Morgan Stanley (MS) and Goldman Sachs (GS), two of the world’s biggest dealmakers, are due to report Tuesday and Wednesday. Bank of America (BAC), which has a big Wall Street operation, also reports Tuesday. All are expected to show drops in investment banking and trading from the first quarter.
What Friday’s results showed is that big banks like JPMorgan (JPM) and Wells Fargo (WFC) that have sprawling consumer franchises are performing well because they are able to charge more for their loans and benefit from a surge in credit-card borrowing by Americans who still have extra money.
"The consumer is in good shape," JPMorgan CEO Jamie Dimon told analysts. “They are spending down their excess cash.”
But Friday also revealed that corporate clients are not providing as much of a lift, which is hurting the banks that rely more heavily on them.
CEOs remain cautious about everything from the direction of interest rates to relations with China to the larger US economy, dampening the optimism needed to buy other companies, go public or take on more debt.
Citigroup CEO Jane Fraser. (AP Photo/Jacquelyn Martin) ·ASSOCIATED PRESS
"Corporates are pretty cautious," Fraser told analysts Friday, citing the prospect of another Federal Reserve interest rate hike, tensions with China and concerns about limited economic growth.
"I think clients have been trying to understand and get their arms around both the macro and the market outlook for a while. I think they now seem to accept the current environment is the new normal and are beginning to position themselves globally."
This caution was most evident in the performance of Citigroup’s corporate and investment banking unit, which helped push overall profits at the bank down 36%. Investment banking revenue fell by 24% in the second quarter, to $612 million.
It wasn’t just Citigroup, though. Even JPMorgan, which churned out massive profits in its consumer business, saw investment banking fees fall by 6% from a year ago, to $1.5 billion.
Trading, which was stronger earlier in the year, also turned weaker. Citigroup’s revenue from that business fell 13%. JPMorgan’s revenue associated with trading equities and fixed income also dropped.
“Most of the investors stayed on the sidelines” during the second quarter, Fraser said.
Solomon under scrutiny
These results do not bode well for Goldman or Morgan Stanley, which rely heavily on deal making and trading for their revenue.
Goldman is expected to show an investment banking revenue decline of 32% from a year ago and a trading decline of 17%, according to analyst estimates.
David Solomon, CEO of Goldman Sachs. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images) ·PATRICK T. FALLON via Getty Images
Goldman is "indicating that the second quarter might be ‘throw the kitchen sink in’ with larger write offs of some of these non-core businesses," Ken Leon, CFRA research director of equity research, told Yahoo Finance Friday.
Thus there will be a focus on Solomon and "whether he can show the strategy they have is going to work," Leon said. "It is going to be a tough issue" for the CEO.
Morgan Stanley is also expected by analysts to show a decline in some of its core businesses, with a 4% drop in investment banking and a 19% decline in trading.
'We will see'
The global slowdown in dealmaking began last year, following a boom in 2021, causing firms across Wall Street to slash bonuses and staff. Worldwide investment banking revenues for the second quarter fell 52% from a year ago, according to Dealogic.
Citigroup, Morgan Stanley, Goldman and other firms with big investment banking and trading units have made or announced cuts of roughly 12,000 jobs since the end of 2022.
Some observers are still predicting “green shoots” ahead, citing an improvement during the latter half of the second quarter.
JPMorgan Chief Financial Officer Jeremy Barnum said investment banking was better than expected in June, but cautioned analysts on Friday that it was “too early” to label it a trend.
“We will see,” he said. For overall capital markets "July should be a good indicator for the remainder of the year."
Smaller banks in the weeks ahead could also show new challenges posed by the behavior of corporate clients.
That's what happened Friday to State Street (STT), which serves a lot of institutional clients and was the nation's 12th largest bank as of March 31. It disclosed Friday that its net interest income, which measures the difference between what it earns from loans and pays out in deposits, fell 10% when compared to the first quarter.
That's largely because of rising deposit rates and a rotation by State Street customers out of non-interest bearing deposits as they seek higher yields. The bank now expects net interest income to drop 12% to 18% in the coming quarter.
Its stock dropped 12% Friday.
"What we found is that our larger clients, and we primarily have large, sophisticated clients, are quite active in thinking about their alternatives,” said Eric Aboaf, State Street CFO. “That has been accelerated by the swiftness of this cycle and the place that we've come to and the speed.”
