JPMorgan Chase CFO Jeremy Barnum said on the company's first-quarter earnings call Friday that the bank had seen good momentum in investment banking, but was still cautious going forward.
JPMorgan Chase has started to break out of the investment banking slump that hit the entire industry last year, though it continues to wait out a merger-and-acquisition market that remains largely stalled.
The $4.1 trillion-asset bank raked in $2 billion of investment banking revenue during the first quarter, up 27% year- over-year, as it took advantage of fees from equity and debt market activity that offset milquetoast deal action.
"We were happy to see the good results in investment banking this quarter, quite strong," Chief Financial Officer Jeremy Barnum said Friday during a call with reporters.
At the same time, JPMorgan expressed caution about the outlook for investment banking due to regulatory headwinds on merger activity and economic factors that could put pressure on markets.
Mark Narron, senior director at Fitch Ratings, said in an interview that investment banking is helping banking industry revenue, and capital markets activity could contribute to a better-than-expected year for fee income at banks.
Like JPMorgan, Wells Fargo on Friday reported promising quarterly results from its investment banking business, fueling a turnaround story that CEO Charlie Scharf has been working on for years. Most recently, Wells hired Doug Braunstein, who previously worked with Scharf at JPMorgan, to strengthen its corporate and investment banking division.
Wells Fargo CFO Mike Santomassimo said on the bank's earnings call Friday that all of its investment banking products saw increased activity during the first quarter, earning $474 million in revenue, up 24% from the previous quarter. The performance in investment banking helped pad the company's overall banking revenue, given decreases in lending and treasury management.
"Our results benefited from the areas where we have had strength for some time such as investment-grade debt capital markets and from the talent we've been attracting into the business," Santomassimo said. "While it is still early, we are encouraged by the green shoots we're seeing."
Brian Mulberry, a director at Zacks Investment Management, said that Wells has to figure out its value proposition in investment banking as it goes up against giants like JPMorgan and Goldman Sachs. Soft demand for IPOs and deals is driving the competitive environment, he added, noting that the sluggishness could be an opportunity for market entrants to develop new relationships.
Fee income from investment banking activities will help Wells Fargo to offset the elevated rates that it is paying to depositors, Mulberry said. If rates stay higher for longer, Wells will need more sources of revenue, he added.
At JPMorgan, last quarter's investment banking results marked progress in rebounding from a slump in the sector. About a year and a half ago, the nation's largest bank by asset size said that it was considering reducing headcount and pay in its investment banking business.
Earlier this year, JPMorgan began reshuffling its investment banking organizational structure. The bank said that it planned to combine financial reporting across its commercial banking and corporate and investment banking divisions starting in the second quarter, instead of disclosing those results separately.
After a record-breaking year of reeling in business from failed banks and scared customers defecting from rivals, the largest U.S. bank expects it will keep getting larger.
On Friday, Barnum broke down JPMorgan's investment banking performance across different products. He said that the narrative around initial public offerings has "changed to a meaningful degree this quarter," and the bank has started to see more promising performance after some disappointing results.
Global IPO volumes fell 7% in the first quarter from the previous year, but proceeds were up 7%, according to a recent report by the accounting giant EY.
Positive dialogue and an improving valuation environment are giving reason for more optimism, Barnum said.
Still, JPMorgan executives added some cautions about the investment banking business. While equity capital market conditions were strong in the first quarter, the bank is mindful that some of the acceleration could be unsustainable, Barnum said.
He added that risk is "even more acute" with debt capital markets. A high percentage of the total amount of debt refinancing that needs to happen this year occurred in the first quarter.
Although interest rates remain high, investors' relative optimism about the economy means they're not charging corporate borrowers as much as they could in a riskier environment. Credit spreads have narrowed this year, meaning the gap between the rates on Treasury securities and corporate borrowing is smaller.
"Credit spreads are actually pretty tight now," Fitch's Narron said. "I think CFOs are saying, 'Oh, this is a good time to issue.' And they're probably realizing that they've lost the waiting game in terms of waiting for rates to go down and find a cheaper rate environment."
The biggest question, according to JPMorgan's Barnum, is about mergers and acquisitions. He said he's heard there's some pent-up demand to get deals going again, but he thinks regulatory headwinds are "chilling" activity. Over time, though, he expects the need to buy or sell will supersede the regulatory environment.
"We're not shy about saying that we're under-earning in investment banking right now," Barnum said on the call. "That's why we're sort of leaning in. We're engaging with clients. We're making sure that we're appropriately resourced for a more robust level of the wallet and fighting for every dollar of share."
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