By Nupur Anand
NEW YORK (Reuters) -CEOs of investment banking giants expressed optimism about a resurgence in capital markets when they reported fourth-quarter earnings on Tuesday on an improving deal pipeline and U.S. economy, but also warned of risks that could disrupt a nascent recovery.
At Goldman Sachs, equities trading revenue jumped 26% in the fourth quarter versus a year earlier, sending shares up more than 1% in morning trading. Later in the day, the stock gave up its early gains and was trading flat.
By contrast, trading revenue at rival Morgan Stanley was broadly flat, but investment banking revenue climbed 5%. Its stock fell nearly 5%.
"The investment banking sector is fiercely competitive and rivalry intense, so it is clear who is going to be the king of Wall Street tonight and which one is going to be pulling out hairs,” Danni Hewson, head of financial analysis at AJ Bell said. Goldman surpassed expectations while Morgan Stanley was "in the doghouse" after missing earnings forecasts, Bell added.
Investors did not share executives' optimism. The KBW index of bank shares slid more than 1%.
"Market sentiment was most positive at the end of 2023 as inflation was going down, interest rate cuts were expected," said Brian Mulberry, client portfolio manager at Zacks Investment Management. "But now there is some realism seeping in and there are concerns if this year will pan out as expected."
Stock markets have recently bounced on speculation that the U.S. will avoid a recession as the Federal Reserve moves toward cutting interest rates later this year, although some market participants are paring back expectations for cuts. Lower borrowing costs typically spur dealmaking and trading at investment banks.
"The U.S. economy proved to be more resilient than expected despite a number of headwinds to growth, including a significant tightening of financial conditions, regional bank failures and an escalation of geopolitical tensions," said Goldman Sachs CEO David Solomon. While the picture for 2024 is improving, "we're going to continue to take a cautious view," he said.
Despite the optimism, concerns around geopolitics and the health of the U.S. economy remain.
While Goldman's trading revenue jumped, its investment banking fees fell 12% to $1.65 billion.
Meanwhile, Morgan Stanley's investment banking revenue climbed by more than its peers, and the bank entered the year with a more confident outlook, its new CEO Ted Pick told analysts on a conference call.
"Our base case for the coming year is constructive," he said, while citing two major downside risks: intensifying geopolitical conflicts and uncertainty over the path of the U.S. economy.
Global M&A activity fell to a decade low last year but some signs of a recovery appeared in the fourth quarter as deal volumes climbed 19%, according to Dealogic.
One-off charges and expenses subdued profits at other lenders including JPMorgan Chase (NYSE:JPM), Bank of America, Citigroup and Wells Fargo.
PNC Financial Services Group (NYSE:PNC)'s which also reported earnings on Tuesday saw its net profit shrink on additional charges.
The banks have been setting aside funds in the fourth quarter to refill the government's deposit insurance fund (DIF), which took a $16 billion hit after Silicon Valley Bank and two other lenders failed last year.
"They are stronger years than 2023 and it's good to have it behind. It wasn't their strongest year but the banks managed it well," said Chris Marinac, director of research at financial adviser Janney Montgomery Scott.