Wall Street Seen Leaning on Dealmakers as Trading Surge Ebbs

Move over traders, it’s dealmakers’ time to shine.

When Wall Street’s biggest banks begin reporting first-quarter earnings on Wednesday, they’re expected to post a 42% surge in investment-banking fees. With last year’s record trading bonanza now on the wane, dealmaking and a flood of reserve releases probably fueled a doubling of profits for the group, based on analysts’ estimates.

Among the biggest contributors: a slew of special purpose acquisition companies that went public during the quarter. According to the projections, that trend probably boosted equity-underwriting revenue 176% to $4.17 billion at the industry’s five biggest banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley.

Wall Street Seen Leaning on Dealmakers as Trading Surge Ebbs

“SPAC and traditional IPO proceeds have been really enormous for the first few months of the year, and that should be a real positive for the largest banks,” Jim Shanahan, an analyst at Edward D. Jones & Co., said in an interview. “But the comparisons look really difficult from here on out.”

Higher profits and fee revenue might not be enough to satisfy investors looking for signs that banks can start expanding their loan portfolios again. Combined total loans at JPMorgan, Bank of America, Wells Fargo & Co. and Citigroup probably dropped 8.2% in the first quarter compared with the same period a year ago, according to analysts’ estimates.

Card balances have been dwindling and deposits soaring after the U.S. government pumped trillions of dollars of stimulus into the economy in the past year, including direct payments to consumers. Businesses have also been reluctant to borrow until the pace of the economic recovery becomes clearer.

“The lack of loan growth hurts for now,” Susan Roth Katzke, an analyst at Credit Suisse Group AG, said in a note to clients, adding that she expects “bank managements to express confidence in prospects for a pickup in commercial loan demand in particular, as the pace of recovery accelerates.”

Wall Street Seen Leaning on Dealmakers as Trading Surge Ebbs

The biggest U.S. banks set aside tens of billions of dollars in loan-loss reserves last year as the coronavirus pandemic shuttered businesses and sent unemployment soaring. But most of the feared losses never materialized.

That’s helped bank stocks soared this year. The 65-company S&P 500 Financials Index has gained 19% since the start of the year, outpacing the 10% advance of the S&P 500 Index.

And it’s also meant that banks have been able to release some of those reserves, a trend that probably continued in the first quarter as the economic recovery gained steam. That should help profits at the five largest Wall Street firms jump 120% to $27.4 billion, according to analysts’ estimates.

“While uncertainty still lingers around the potential timing and magnitude of losses, it is remarkable how much more benign the credit outlook appears relative to expectations,” Jeff Harte, an analyst at Piper Sandler Cos., said in a note to clients. “Industry data points and management-team commentary are not signaling the wave of losses that had been feared.”

Wall Street Seen Leaning on Dealmakers as Trading Surge Ebbs

Wall Street’s traders were on a tear for much of 2020, when the coronavirus pandemic roiled markets and sent volatility soaring. With tougher comparisons to compete with and some of that volatility beginning to recede, first-quarter total revenue from trading fixed-income products and equities is expected to slip 0.2% to $27.3 billion.

That means all eyes are on investment bankers, who have seen mergers and acquisitions begin to pick up on top of the gains in equity-underwriting revenue. But even more important than the results will be executives’ comments on where the industry is headed for the rest of the year.

“It’s going to be less about what they report and more about what the outlook is,” Shanahan at Edward Jones said.

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