(Bloomberg) -- The first three US banking giants to report midyear earnings are leaning on a revival in Wall Street dealmaking as high interest rates take a mounting toll on income from lending.
Investment bankers and underwriters at JPMorgan Chase & Co. and Citigroup Inc. posted their best second-quarter in three years as merger activity and debt capital markets began to rebound. Even Wells Fargo & Co., smaller in those areas, saw fees from that business leap 63% to $634 million.
A wall of maturing debt securities sent clients running to refinance, Citigroup Chief Financial Officer Mark Mason told journalists on a conference call Friday. He flagged interest in convertible bonds, positive momentum in mergers and acquisitions and a “glimpse of revival” in initial public offerings.
“The pipeline, as I mentioned, is quite strong,” he added.
The results marked a reprieve for Wall Street operations that saw corporate dealmaking drop when US interest rates rose, making many transactions more expensive. Now the toll is coming to bear in the traditional banking business of lending out money from depositors, who are demanding higher interest payments on their savings.
That pushed net interest income down at all three firms compared with the first quarter. The banks also set aside more money to cover souring loans to consumers, with Citigroup noting that many consumers with low credit scores are spending less because they no longer have the rainy-day savings they built up in the pandemic.
Overall, JPMorgan reported a record quarterly profit of $18.1 billion, helped by a one-time gain tied to a Visa Inc. share exchange. Net income also rose at Citigroup, while it slipped at Wells Fargo.
Broadly, executives predicted that dealmaking will remain robust, even as they pointed to factors that might temper that.
The value of deals globally rose 13% to $1.5 trillion in the first half, compared with a year earlier. That was driven by sizable transactions, such as Johnson & Johnson’s $13.1 billion pact in April to take over Shock wave Medical Inc. That same month, ConocoPhillips’s agreed to buy Marathon Oil Corp. for about $17 billion.
At JPMorgan, investment banking fees soared 50% to $2.4 billion in the second quarter, driven by gains “across all products,” according to an investor presentation. After a weak quarter a year earlier, the bank closed a few large deals, CFO Jeremy Barnum told analysts, noting that “Dialog on M&A is quite robust.”
Citigroup’s investment banking fees surged 63% to $935 million on gains in debt and equity capital markets, as well as higher advisory revenues.
To be sure, both Mason and Barnum acknowledged that many clients chose to refinance their loans earlier in the year, which might mean that the flurry in debt underwriting may not last through year-end.
“There are some important caveats” Barnum said. In debt-underwriting, the quarter “reflects a bunch of pull-forward, and therefore we’re reasonably cautious about the second half.”
--With assistance from Matthew Monks.
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