Major US and European investment banks are poised for a surge in advisory and underwriting revenues in 2024 driven by rebounding M&A and capital markets activity.
Favorable market conditions coupled with expectations for economic recovery and interest rate cuts boosted company and investor sentiment in the first half of 2024, resulting in more business for banks. After a strong first three months, sector revenues grew again in the second quarter with all leading US and European investment banks posting higher results than a year ago, S&P Global Market Intelligence data shows.
Healthy deal pipelines and pent-up demand from private equity investors will provide a further boost for advisory and underwriting business in the coming quarters, industry experts said.
"Overall the outlook is very bright," Eric Li, head of global banking research at research company Coalition Greenwich, an S&P Global company, said in an interview. Sector revenues at the top 12 global investment banks are expected to be about 30% higher in full year 2024 versus 2023, he said.
Sector revenues in the second half of 2024 are currently seen on par with the first, but the US election is a key factor that could change the outlook. Revenue growth could range from 27% to 35% depending on the impact of the election, Li said.
"We just don't really know whether the US election is going to cause everybody to put a pause on the market," Li said, adding that there has been no sign of a significant slowdown yet.
Coalition Greenwich tracks Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, JPMorgan Chase & Co., Morgan Stanley, Société Générale SA, UBS Group AG and Wells Fargo & Co. in its current investment banking index.
Stronger H2 for M&A
Advisory revenues are likely to be stronger in the second half of the year thanks to the higher number of M&A deals announced in the first six months of 2024, most of which would likely close by year-end, Li said.
So far in 2024, most major US and European investment banks have advised on a higher number of announced M&A deals than in the same period of 2023, Market Intelligence data shows.
Broadly, the current sentiment among banks is that M&A will be a big driver for business over the next six to 12 months, Kiran Kumar, director at financial advisory firm Acuity Knowledge Partners, told Market Intelligence. This is closely related to expectations of rate cuts later this year, especially in the US, Kumar said.
A Fed rate cut would be a "significant catalyst" for further M&A activity as many companies have already identified a target and would be ready to execute once they see interest rates start to decline, Kumar said.
Pent-up demand from private equity firms is another factor as firms have already started selling assets which they have held for too long, and would become even more active when Fed cuts begin, according to Kumar.
Private equity firms held roughly 27,000 portfolio companies globally at the start of the year, half of which have been in the firms' portfolios for more than four years, which is usually when private equity investors would look to sell, Kumar said.
Investment bank executives have also said they have noticed increased activity from private equity firms so far in 2024 as many of those firms are actively reviewing portfolios and looking for ways to exit companies.
Capital markets outlook
The outlook for equity capital markets revenues remains positive with robust year-to-date performance in the IPO market, Li said. Debt capital markets revenue growth will slow somewhat in the second half of 2024, after strong growth in the first which was marked by outperformance in both investment grade and high-yield bond underwriting, Li said.
"We would see the investment grade side slow down a little bit which means the second half [of the year] is probably not going to be as strong as the first half," Li said.
Most major US and European investment banks have reported higher debt capital markets and equity capital markets revenues for the second quarter after booking growth in the first, data compiled by Market Intelligence shows.
