Citi and Morgan Stanley ride dealmaking wave lifting Wall Street

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Citigroup and Morgan Stanley both benefited from a surge in dealmaking that bolstered revenues in the third quarter and helped offset continued pressure from low interest rates and weak loan demand.

In third-quarter earnings on Thursday, Morgan Stanley posted investment bank revenues of $2.85bn, up 67 per cent from $1.7bn a year earlier and well ahead of analysts’ forecasts for $1.9bn, according to data compiled by Bloomberg.

The outperformance relative to analysts’ estimates came from far better than expected fees from advisory work on mergers and acquisitions.

Rival JPMorgan Chase in earnings on Wednesday reported a 52 per cent rise in investment banking fees that totalled $3.3bn.

Investment banks are raking in record sums from fees thanks to a rush of dealmaking, compensating for a drop in trading revenue that surged in the first year of the pandemic amid extreme market volatility.

“The investment banking side, the lens I have right now is in the fourth quarter and I think that the fourth quarter remains strong with clients active,” Sharon Yeshaya, Morgan Stanley’s chief financial officer, told the Financial Times.

Wall Street had forecast a 2 per cent decline in revenue across Citi’s business lines as fees from fixed income trading normalised after reaching record highs at the height of the pandemic.

Investment banking fees have stepped in to pick up the slack, jumping 39 per cent, as markets revenue dropped 4 per cent.

Citi said group-wide revenue rose 3 per cent excluding the impact of a loss from the sale of the bank’s consumer business in Australia. Including that impact, revenue dropped 1 per cent to $17.2bn.

At Bank of America, which also reported earnings on Thursday, investment banking fees rose 23 per cent to $2.2bn, helping it achieve overall double-digit revenue growth.

Heightened activity among Citi’s institutional clients also offset declines in its global consumer business, where revenue dropped 13 per cent owing to almost non-existent loan demand.

Costs rose 5 per cent as the company continued investing it in operations to satisfy a regulatory consent order.

Citi told investors costs for the year would now be higher than initially planned on the back of planned investments by the bank. Expenses had emerged as a “wild card” for bank earnings this quarter,

Overall, Citi reported net income of $4.6bn, or $2.15 per share, compared with earnings of $3.1bn, or $1.36 per share, in the third quarter of 2020.

Though fixed income trading fell across the board, it was not as bad as the 20 per cent declines projected by analysts such as Coalition Greenwich.

Citi reported a 16 per cent decline in fixed income trading fees, while Morgan Stanley reported a 16 per cent drop and BofA’s earnings here declined less than 1 per cent.

“We were too conservative,” Credit Suisse analyst Susan Katzke acknowledged in a note to clients after initial earnings results.

More recent swings in oil markets helped slow some of the decline Wall Street had been bracing for.

“Volatility towards the end of the year certainly did create opportunities for us to trade with investor clients and other clients who were repositioning,” Citi CFO Mark Mason told reporters.

Morgan Stanley reported overall group revenue of $14.7bn, up from $11.7bn a year earlier and beating analysts’ consensus for $13.7bn. Year-on-year revenue comparisons were flattered by the integration of Morgan Stanley’s recent purchases of ETrade and Eaton Vance.

Morgan Stanley’s total net income of $3.5bn was up from $2.6bn a year earlier and also ahead of forecasts for $3bn.

By midday in New York, Morgan Stanley shares were up 1.5 per cent. Citi shares were flat and BofA had climbed 2.9 per cent.