Investment banks anticipate return to Wall Street spotlight
Wall Street investment banks, loathed by investors in 2011 and hobbled by weak trading last year, are poised for a return to the spotlight.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley are among U.S. banks reporting fourth-quarter results this week amid a rise in fixed-income and equity trading and the most mergers and acquisitions since 2008. Investment-banking and trading revenue probably jumped 44 percent in the period from a year earlier, according to estimates by Betsy Graseck, a Morgan Stanley analyst in New York.
The turnaround has led analysts such as KBW Inc.'s David Konrad and investors including Michael Holland, chairman of Holland & Co., to see more value in large banks with capital-markets operations than in regional ones focused on lending. The shift reflects optimism about trading and mergers and concern that low interest rates will squeeze loan margins.
"I would rather have exposure to banks that have capital-markets units than a pure-play bank," said Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages about $830 million. "If we get some clarity eventually on the budget and fiscal-cliff issues, risk will come back into the market and help trading volumes. And we've been primed for a long time for a spike in the M&A cycle."
A pickup in trading and investment-banking revenue from the levels of the past two years could buoy an industry besieged by higher capital requirements, declining profitability and thousands of job cuts. It also may provide ammunition to supporters of the universal banking model. Investors and analysts including CLSA Ltd.'s Mike Mayo have called for breaking up the biggest banks because they have produced low returns on capital and trade below book value.
Goldman Sachs, which reports fourth-quarter results today, may earn $3.66 a share, about double the amount from a year earlier, according to the average estimate of 26 analysts surveyed by Bloomberg. Seventeen of them have increased their forecasts in the past four weeks. Morgan Stanley may earn 40 cents a share, the most in more than a year, according to estimates from Oppenheimer & Co.'s Chris Kotowski, who excludes charges related to changes in the value of the firm's own debt.
Trading revenue probably will jump more than 10 percent in 2013, while advisory revenue may increase by 25 percent, said David Trone, an analyst at JMP Securities LLC in New York, who upgraded the largest Wall Street banks this month after rating them underperform the previous seven months. Daniel Loeb's hedge fund Third Point LLC wrote in a letter to investors last week that it took a stake in Morgan Stanley in part because it expects corporate business to increase.
Companies announced $730.3 billion of global mergers and acquisitions in the last three months of the year, the most since the third quarter of 2008, according to data compiled by Bloomberg. Average daily trading of high-yield bonds jumped 45 percent from a year earlier, according to Trace, the price- reporting system of the Financial Industry Regulatory Authority. Global equity trading increased 6 percent from the third quarter, according to Bloomberg Industries.
The 80-company Standard & Poor's 500 Financial Index rose 26 percent last year, its largest annual increase since 2003, led by a 109 percent gain in Bank of America Corp. The index beat the broader S&P 500 Index for the first time since 2006 as shareholders rewarded firms for cutting costs to improve returns and the European Central Bank helped head off a debt crisis.
Still, Wall Street banks trade at lower multiples of their liquidation values than regional lenders, leading some analysts to predict more potential gain if earnings or confidence improves. None of the five biggest firms JPMorgan, Bank of America, Citigroup Inc., Goldman Sachs and Morgan Stanley trade above 1.25 times tangible book. Wells Fargo & Co., U.S. Bancorp and Capital One Financial Corp. all trade at more than 1.5 times.