With the potential for the Federal Reserve to cut interest rates as soon as this September, there may be added hurdles for investment banking to keep profitability high even after several banks reported positive second quarter results.
CFRA director of equity research Ken Leon joins Market Domination to discuss the state of investment banking and how these big banks may operate moving forward in current and future interest rate environments.
On sustainability of growth for investment banking, Leon comments: “We hit the trough for investment banking fees last year, probably in July. We’re still at just the beginning of a rebound, but saying that, the first quarter, first half of this year had record results for debt cap, debt underwriting. But equity underwriting and IPOs, are still really in early innings of recovery. And keep in mind, there’s two major sources for deals: one is obviously corporates, but the one that has not been participating as it tries to figure out valuation with rates is financial sponsors.”
For more expert insight and the latest market action, click here to watch this full episode of Market Domination.
This post was written by Nicholas Jacobino
Video Transcript
Um let’s talk about some other financials as well today, the bigger ones, Bank of America Morgan Stanley, adding to the upbeat trend in investment banking, specifically, both banks see big gains in that business.
A similar tone from Piers Jp Morgan City and Wells Fargo.
Yet with fed rate cut expectations still unfolding, there are challenges ahead peeking through for big banks.
CFR A director of equity research, Ken Leon is joining us now to discuss can um normally we’ve been starting sort of big picture here, but I want to zoom right in on Bank of America because you downgraded that stock to a sell today in the wake of these earnings, even though the shares have been doing pretty well, their highest.
In fact, in about two years, uh they gave a forecast for net interest income that was above some estimates.
What didn’t you like in these B of A results?
Yeah, it’s great to be with you.
So, so I think Bank of America’s, it’s a 15 year high.
So that’s pretty good.
Um, rates outlook and the economy are good.
Uh So all the financial stocks, large bank stocks are doing great.
Um But for Bank of America.
Um The performance in the second quarter was like the first quarter.
Uh We had flat no growth in loans, no growth in deposits, no growth in credit card income, which is significant and we saw a decline in net interest income.
So a lot of the storyline on the call, which I think analysts kind of liked was that even though you had negative net interest income, which is 54% of your total revenue.
Uh It’s gonna get better in the second half of this year.
Uh because in the second quarter deposits uh decline for consumers who had a pay taxes.
So it’s kind of weird to see the stock up.
But I think that’s more to the macro core financials and banks.
Uh I thought Bank of America underperformed compared to JP Morgan Goldman Sachs or Morgan Stanley today.
And how could you, you know, you do move to a cell there, Ken.
Um when you were talking to your clients, how could you be wrong, Ken?
What, what are the, the upside risks to that call?
Well, there’s always respect, you know, we’re all students of the market.
So uh what we do, of course, on any recommendation um is make a judgment call based on our insights, our, our views of the fundamentals and of course our experience.
So, um you know, CFR A is the largest independent research firm in the world and we make independent calls and that speaks to your question.
Um You mentioned Morgan Stanley and its numbers today, um, saw some strength in investment banking.
That’s what we saw.
Um For many of these banks, particularly in the capital markets, business as well.
Um How sustainable do you think deal volumes are gonna be going into the second half of the year, particularly with the election coming up?
Sure.
It’s a great question and, uh, we hit the trough or investment banking fees last year probably in July.
Uh We’re still at just the beginning of a rebound.
Uh But saying that uh the first quarter, first half of this year, uh record results for debt cap, debt underwriting, but equity underwriting and IP OS um are still really the earning early endings of recovery.
And keep in mind there’s two major source for deals.
One is obviously Corporates, but the one that has not been participating as it tries to figure out valuation with rates is financial sponsors.
Uh That’s the old industry that I cover, which includes companies like Blackstone Kkr Hollow and many others.
So that’s $1.2 trillion in their investment that has to be monetized.
Uh Otherwise there are wealthy, limited partners around the world in the Mideast or Singapore or wherever, aren’t going, going to go into new funds.
So that is a major opportunity.
Uh For Morgan Stanley Goldman Sachs and each of these firms also are participating in the old investments as well.
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