July 21, 2024

Wall Street banks want to forget about 2023. But 2024 may not be much better.

This was yet another year to forget for much of Wall Street.

Dealmaking slowed. Thousands of jobs were cut. Bonuses were slashed.

How bad was it? By one measure, it was the worst in a decade. Through mid December revenue from investment banking was on pace to be the lowest of any year since 2013, according to data from Dealogic.

Many of the biggest names on Wall Street are likely hoping for a new chapter in 2024.

Goldman Sachs (GS) CEO David Solomon needs to show his firm can regain some of its swagger. Citigroup (C) CEO Jane Fraser is trying to prove that an aggressive reorganization can remove decades of bloat. Morgan Stanley’s (MS) new CEO, Ted Pick, will be trying to fill the shoes of longtime boss James Gorman.

Goldman Sachs chairman and CEO David Solomon speaks during Goldman Sachs analyst impact fund competition at Goldman Sachs Headquarters in New York City, U.S., November 14, 2023. REUTERS/Brendan McDermid

Goldman Sachs CEO David Solomon. REUTERS/Brendan McDermid (Reuters / Reuters)

Many on Wall Street predict this coming year will be better, with more mergers and initial public offerings returning after a long drought.

But many things have to go right for that to happen. Not only does the economy have to take off, but leaders of companies need to become a lot more certain about the future.

Wall Street is betting the spark will be the end of the Federal Reserve’s aggressive monetary tightening campaign, and that interest rate cuts could start as early as March.

One danger is that the Fed doesn’t act on that same timetable, or that inflation surges again, forcing the central bank to hold rates higher for longer. Another is that rates come down because a recession is raging.

“Financial companies are products of the economy,” Gerard Cassidy, a bank analyst with RBC Capital Markets, told Yahoo Finance. “When we talk about revenues for 2024, they have to have cooperating markets.”

‘Green shoots’

The slump weighing down much of Wall Street is two years in the making. It started in 2022, following a boom in 2021.

Clients turned cautious about everything from the direction of interest rates to relations with China to the larger US economy, dampening the optimism needed to go public, buy companies, or take on more debt.

This year was supposed to be when things turned around, fueled by a series of public offerings that would finally break open an IPO logjam. Several companies did go public in the third quarter — including ARM Holdings (ARM), Instacart (CART) and Klavyio (KVYO) — but some fell in price after their market debuts.

That mixed performance raised questions about whether other companies considering an IPO would follow. Those doubts intensified amid higher borrowing costs, concerns about an extended period of high interest rates, volatility from geopolitical tensions, and new worries about the possibility of a recession.

Many executives that had been touting signs of “green shoots” warned it would now likely take longer for any sustained gains to show up.

For the first three quarters of 2023, fees from dealmaking, IPOs and bond underwriting collectively for the five major banks with Wall Street operations were down 12.4% compared to the same 9-month period in 2022.

On the trading side, fixed income and equities revenue for this group fell 6% for the same period.

Not all banks struggled. For the first nine months of 2023, profits rose 14.6% and 51% at Bank of America and JPMorgan Chase (JPM).

But profits at Citi, Morgan Stanley and Goldman Sachs fell 10%, 14% and 34% compared with the same period last year.

‘More supportive for improved conditions’

The final quarter of the year likely won’t be much better, based on expectations set by bank executives at a Goldman Sachs Financial Services conference earlier this month.

Investment banker fees at Bank of America (BAC) were “down low single digits” during the fourth quarter, according to CEO Brian Moynihan. Trading, which had been outperforming peers during 2023, would be “up low single digits year-over-year.”

Because volatility often drives trading activity, any large interest rate change next year “will likely drive more hedging and trading activity,” Jim DeMare, head of that Bank of America division, told Yahoo Finance.

Citigroup CFO Mark Mason said he expects trading would be down 15-20% quarter-over-quarter and investment banking revenue for the fourth quarter to be “up in the high single digits.”

Citigroup is in the midst of what its CEO, Fraser, calls its “most consequential” reorganization in 20 years. It began layoffs in late November and is dismantling pieces of its empire as it seeks to return to profitability. Its profits fell 10% for the first nine months of 2023 compared with the prior year.

Citigroup CEO Jane Fraser looks on during the U.S. Senate Banking, Housing and Urban Affairs Committee oversight hearing on Wall Street firms, on Capitol Hill in Washington, U.S., December 6, 2023. REUTERS/Evelyn Hockstein

Citigroup CEO Jane Fraser. REUTERS/Evelyn Hockstein (REUTERS / Reuters)

At Goldman Sachs, a longtime leader in advising companies on mergers and IPOs, the year has been marred by both the tepid rebound for those markets and its ongoing retrenchment from consumer lending.

Net earnings for the bank in the first nine months of the year fell 34% compared with the same period last year.

A string of companies going public temporarily revived bankers’ hopes that the IPO market could thaw from last year. But the activity slowed down “quite significantly” in October, Goldman Sachs CFO Dennis Coleman said.

That month, a surprise attack by terrorist group Hamas against Israel and the 10-year Treasury yields peaking above 5% for the first time since 2007 put CEOs on more cautionary footing.

Goldman’s results will likely reflect that caution. Its investment banking revenues in the fourth quarter were “below trend” while trading was “trending nearly flat year-over-year,” Coleman added.

“The macroeconomic backdrop, I think, is more supportive for improved conditions moving into 2024.”

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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