Jane Fraser, CEO of Citigroup (C), didn’t mince words on Friday when discussing how the Wall Street side of her bank would perform during the second quarter of 2023.
“The long-awaited recovery in investment banking has not yet materialized, making for a disappointing quarter,” it said in a statement.
Initial results are coming from some of the largest banks in the country, and they are sounding warning signs of a rough week on Wall Street.
Morgan Stanley (MS) and Goldman Sachs (GS), two of the world’s largest dealmakers, are due to report on Tuesday and Wednesday. Bank of America (BAC), which has large operations on Wall Street, also reported on Tuesday. All of them are expected to show a decline 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 doing well because they’re able to charge higher fees for their loans and take advantage of the increased credit card borrowing by Americans who still have… extra money.
“The consumer is doing well,” JPMorgan CEO Jamie Dimon told analysts. “They spend their extra money.”
But Friday also revealed that corporate customers are not offering as much support, which is hurting the banks that rely on them most.
CEOs remain cautious about everything from the direction of interest rates to relations with China to the larger US economy, tempering the optimism needed to buy other companies, go public or take on more debt.
“Companies are very cautious,” Fraser told analysts on Friday, citing the prospect of another rate hike by the Federal Reserve, tensions with China and concerns about limited economic growth.
“I think clients have been trying to understand both the macro outlook and the market outlook and get their arms around it for a while. I think they now seem to accept that the current environment is the new normal and are starting to position themselves globally.”
That caveat was most evident in the performance of its investment banking unit and Citigroup subsidiaries, which helped drop total profits at the bank by 36%. Investment banking revenue fell 24% in the second quarter, to $612 million.
It wasn’t just Citigroup, though. Even JPMorgan, which has been making huge profits in its consumer business, saw investment banking fees fall 6% from a year ago, to $1.5 billion.
Trading, which was stronger earlier in the year, is also getting weaker. Citigroup’s revenue from that business fell 13%. JPMorgan’s revenue related to equity trading and fixed income also declined.
“Most investors stayed on the sidelines” during the second quarter, Fraser said.
Solomon is 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 a 32% decline in investment banking revenue from a year ago and a 17% decline in trading, according to analyst estimates.
That could intensify scrutiny from CEO David Solomon, who is grappling with partner unrest and concerns about strategy as he tries to put a consumer banking experience behind the company.
Goldman “suggests that the second quarter could be a ‘kitchen sink dump’ with larger writedowns for some of these non-core companies,” CFRA director of equity research Ken Lyon told Yahoo Finance on Friday.
Lyon said there will be a focus on Solomon and “whether or not he can show what strategy they have”. “It’s going to be a tough case,” for the CEO.
Analysts expect Morgan Stanley to also show declines in some of its core businesses, with a 4% decline in investment banking and a 19% decline in trading.
‘We’ll see’
The global slowdown in deal-making began last year, after a boom in 2021, prompting companies across Wall Street to cut bonuses and staff. Worldwide investment banking revenue for the second quarter fell 52% from a year ago, according to Dealogic.
Citigroup, Morgan Stanley, Goldman and others with large investment banking and trading units have made or announced nearly 12,000 job cuts since the end of 2022.
Some observers still expect “green shoots” ahead, citing an improvement over the latter half of the second quarter.
JPMorgan CFO Jeremy Barnum said investment banking was better-than-expected in June, but warned analysts on Friday that it was “too early” to classify it as a trend.
We’ll see, he said. For capital markets in general, “July should be a good indicator for the remainder of the year.”
In the coming weeks, smaller banks may also present new challenges posed by the behavior of corporate clients.
That’s what happened Friday to State Street Corporation (STT), which serves a lot of institutional clients and was the second-largest bank in the country as of March 31. On Friday, it revealed that net interest income, which measures the difference between what it earns on loans and on deposits, fell 10% compared to the first quarter.
This is largely due to higher deposit rates and State Street clients rotating non-interest deposits while seeking higher returns. The bank now expects net interest income to fall 12% to 18% in the next quarter.
Its stock fell 12% on Friday.
“What we’ve found is that our larger customers, primarily our large, high-end customers, are quite active in considering their alternatives,” said Eric Apauve, State Street’s chief financial officer. Where we’re at and how fast.”
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