American Bank Stocks Surge on IB Comeback and Improving Outlook on Short-Term Rates

Shares of US Banks have surged in the wake of recent quarterly earnings reports that showed a growing recovery in the investment banking and capital markets businesses of large financial institutions. M&A and IPO activity looks to be on pace for a steady turnaround from relatively weak 2022-2023 volumes, bolstering income from underwriting and advisory fees. For their smaller regional peers, optimism has emanated from a nearing of Fed rate cuts that will likely narrow unrealized losses held on their securities portfolios and stem the narrowing of net interest margins. 

Commercial deposits held by US banks have risen YoY across 17 consecutive weeks, continuing an easing of liquidity concerns. Several of the largest banks are further shoring up their finances with a renewed debt haul that has seen tens of billions of dollars raised in July alone. Loan loss provisions were increased by some banks in the second quarter but data shows that the value of these reserves – while still elevated near $200 billion – has largely moved sideways since the start of the year.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

The latest spate of bank earnings coincided with the SPDR S&P Bank ETF’s (KBE) best 5-day span of trading since November 2020, rising by 12% in the period to Wednesday. The market’s positive reaction to second quarter results was largely based on an ongoing rebound in the investment banking divisions of America’s largest financial institutions and some light at the end of the tunnel for beaten down regional banks that have languished under persistently high short-term rates at the Fed.

In our July 1 Intelligence Briefing, we noted that results from Jefferies Financial Group, which come in well before most other financial firms, demonstrated a powerful performance from its capital markets and IB businesses. That disclosure resulted in Jefferies’s stock price touching an all-time high. We noted that the bounce in revenues could foreshadow similar strength for its larger peers. This was to be expected as global M&A volumes were up about 8% in Q2 YoY, but JPMorgan, Citigroup and Wells Fargo reported particularly strong annual increases in their IB revenue of 46%, 60% and 38%, respectively. In fact, the Financial Times reports that Q2 was Wall Street’s best quarter for investment banking in more than two years and four of the five largest US banks (with Goldman Sachs being the exception) announced higher than expected investment banking revenues for the quarter.

That was a helpful boost, but US banks will need to see a continued resurgence of M&A to keep an increasing level of fees rolling in. Goldman Sachs noted that M&A volumes were still about 20% below 10-year averages, largely as a result of persistently slow private equity dealmaking volume. Bloomberg notes that PE sponsors have constituted up to 30% of investment banking revenue in some recent years. A burgeoning recovery in the underwriting of new public listings would also…