After several quarters of considerable under performance, investment banking is beginning to exhibit signs of renewed strength in the United States. Across the industry, firms are reporting improved profitability, albeit more based on declining expenses than growing top line revenues. That being said, investment banking is leading some of the limited revenue expansion seen at top financial institutions as the cyclical nature of the industry seems to be poised for a potential upturn.
According to a Brad Hintz, banking analyst at Sanford C. Bernstein, who was cited in a Yahoo Finance article, equity underwriting volumes “are up by 30 percent,” while mergers and acquisitions are “are up over 20 percent.” These are significant gains in an industry that has been plagued by declining equity underwriting and merger activity for several years since the financial crisis.
Firms that Shifted Focus to Other Activities Begin to Underperform
Morgan Stanley was one such firm that began the year on a positive note, posting a healthy first quarter profit of $1.2 billion that exceeded analyst expectations. However, the outlook for Morgan Stanley may not be as optimistic as the first quarter may indicate. Over the past few years, the Wall Street giant began to shift away from its traditions in investment banking and trading while shifting its focus to wealth management. Unfortunately for the firm, this segment is beginning to look as though it may lag investment banking in terms of growth in the coming years. The wealth management business is “probably isn’t going to pick up until 2014,” according to Hintz.
This outlook contrasts with the major Wall Street players that chose to maintain their focus in investment banking rather than bail out towards the safer pastures of wealth management. Firms such as Goldman Sachs stand to benefit greatly from an uptick in investment banking, as most of their revenues are derived from these and other riskier activities. In fact, Goldman was one of the only big firms on Wall Street to report growth in top line revenues as well as growth in profits in the first quarter on the back of the improving investment banking industry.
Firms that focus on mortgage lending also underperformed the investment banking leaders as well, with lending to households and businesses continuing to struggle along with a lackluster economy. Revenues at firms such as Wells Fargo, Bank of America and JP Morgan fell in the first quarter.
What are the Implications for Investment Banking Job Seekers?
This upturn in the outlook for investment banking will be a welcome development for those seeking opportunities within the industry. For the first time in several years, there seems to be some positive momentum developing. That said, the economic recovery at this point is still tenuous, and the long term health of the economy is fragile. However, if the current path towards recovery can be maintained, perhaps the tide will soon turn in the investment banking industry and potential job seekers may find a help wanted sign instead of the steady stream of pink slips employees have been faced with for the past several years.