Item 1 of 2 People walk in the financial district near the New York Stock Exchange (NYSE) on December 29, 2023 in New York, USA. REUTERS/Eduardo Muñoz/File photo
(1/2) People walking in the financial district near the New York Stock Exchange (NYSE) in New York, USA, on December 29, 2023. Reuters/Eduardo Muñoz/File Photo Purchase License Rights, opens in a new tab Investment banking boosts profits as loan loss provisions weigh on net interest income above deposit costs
Oct 17 (Reuters) – Third-quarter profits at U.S. regional banks beat Wall Street expectations as a resurgence in deal trading caused investment banking fees to soar, offsetting higher deposit costs.
Capitalizing on the stock market rally, underwriting and M&A activity accelerated, banking on economic resilience and expectations for further interest rate cuts from the Federal Reserve this year.
“All odds are in our favor for increased dealmaking,” said David Russell, global head of market strategy at TradeStation.
“More transactions are likely as interest rates fall over the next six to 12 months.”
The results highlighted the growing relevance of investment banking to regional players.
These services primarily include JPMorgan Chase (JPM.N), Open in new tab, Goldman Sachs (GS.N), Open in new tab, Morgan Stanley (MS.N), Open in new tab. Once the domain of Wall Street giants such as Bank of America, regional banks have carved out a niche among mid-sized companies.
“Improving credit spreads and lower interest rates are encouraging debt issuance, and high equity valuations should encourage initial public offerings (IPOs),” said Stephen Biggar, financial services analyst at Argus Research. , added that improved CEO credibility is also driving mergers and acquisitions.
Investment banking profits allow regional financial institutions to cushion the blow from higher deposit costs caused by paying more interest to prevent customers from moving to alternative financial institutions such as money market funds. I was able to do that.
Biggar said those pressures could ease if the Fed cuts rates further.
“This momentum could continue beyond the election and into the end of the year,” said Michael Ashley Shulman, chief investment officer at Running Point Capital.
“Increased M&A and the continued reopening of the IPO market should further increase fees and support earnings.”
U.S. banks’ investment banking and capital markets businesses shine
Normalization rather than deterioration
Banks are allocating more reserves for potential loan defaults as consumers burn through savings accumulated during the pandemic, but executives say the increase is not alarming.
“The increase in loan loss reserves that the industry is seeing is largely due to normalization rather than widespread credit deterioration,” Flushing Financial (FFIC.O) CEO John Brann said. Open a new tab.
Still, local banks may need to manage their loan books carefully, especially since they are heavily exposed to the troubled commercial real estate (CRE) sector.
Macrae Sykes, portfolio manager at Gabelli Funds, said: “In general, there is more concentration[among smaller banks]in some of the more difficult CREs, and fundamental improvements will be made in managing these loans.” It depends on improving the environment.”
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Reporting by Niket Nishant and Manya Saini in Bengaluru. Additional reporting by Pritam Biswas and Arasu Kannagi Basil. Editing: Arun Koyyur, Alan Barona
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