Dealmaking Powers Banks

Sebastien Callebaut -

Lower Interest Rates Boost Deals

Goldman Sachs posted a stellar third-quarter profit, marking a 45% surge, thanks to the favorable conditions created by lower interest rates and a stable economy. The Wall Street powerhouse, along with other big investment banks, reported better-than-expected results as dealmaking activity picked up, signaling optimism that the economy is on track for a soft landing.

  • Goldman’s profit climbed to $2.99 billion, with revenue up by 7%, reaching $12.7 billion. These strong results were mirrored by other major players in the sector, including Bank of America and Citigroup, both of which demonstrated robust dealmaking performance.
  • This recovery in financial services was supported by a positive outlook from executives, who noted that the recent Federal Reserve interest rate cuts have boosted corporate optimism, sparking renewed economic activity.

The Revival of Wall Street Dealmaking

David Solomon, CEO of Goldman Sachs, highlighted the growing demand from clients for mergers and acquisitions (M&A) during a conference call, pointing out that the beginning of a rate cut cycle has renewed optimism across the market. Solomon acknowledged that while M&A volumes remain below their 10-year average, the current environment presents ample opportunity for growth as more companies return to the negotiating table.

  • The Federal Reserve’s rate cuts have also provided a boost, improving conditions for debt and equity underwriting.
  • Goldman’s investment banking revenue jumped 20% from last year, reaching $1.87 billion, largely driven by increases in debt and equity underwriting.

The revival of dealmaking is being felt across Wall Street, with JPMorgan Chase, Bank of America, and Citigroup all reporting substantial gains in investment banking fees. For example, Bank of America saw a 15% increase, bringing its fees to $1.44 billion, while Citigroup’s surged by 44%, reaching $999 million.

M&A Activity, Debt Underwriting And Trading Surge

M&A volumes are gradually rebounding after a lull in activity caused by high interest rates, with global M&A volume reaching $909 billion in the third quarter, up from $744.6 billion the previous year. Although this is still far from the highs of 2021, when M&A hit $1.57 trillion, there are signs of steady recovery, particularly in debt underwriting.

  • As rates decline, many companies are taking advantage of the opportunity to refinance existing debt at lower costs, propelling growth in underwriting.
  • Goldman’s CFO, Denis Coleman, noted the bank is seeing increasing demand for financing acquisitions, a trend expected to continue as M&A activity gains momentum.
  • According to Dealogic, global debt capital market deals grew by over 40% in the third quarter, totaling $2.17 trillion.

Goldman Sachs also reported gains in its trading arm, where revenue increased to $6.46 billion, slightly up from $6.35 billion the previous year. The boost in equities and lending to institutional clients played a key role in this growth, with similar gains seen at other major banks.

  • Bank of America’s trading revenue surged 12%, while Citigroup saw a notable increase in equities trading despite a decline in fixed-income revenue.
  • Goldman’s push into lending to institutional clients has become a key strategy for generating more predictable revenue, with its Fixed Income, Currencies, and Commodities (FICC) financing group achieving record revenue of $949 million in the quarter, up 30% from a year earlier.

Asset and Wealth Management Continue To Advance

Another key area for Goldman is its asset and wealth management division, which saw a 16% increase in revenue, totaling $3.75 billion. The firm has been focused on building a more stable stream of revenue from managing investments for wealthy clients, as well as institutional investors. Management and other fees in this division rose by 9%, reaching a record $2.62 billion.

  • This focus on wealth management is part of Goldman’s broader strategy to create a steady stream of fee-based income that can cushion the impact of potential slowdowns in its more volatile investment banking and trading operations.
  • Despite its strong results, Goldman Sachs continues to face challenges, especially with its exit from consumer lending. The bank took a $415 million pretax hit in the third quarter from its consumer-lending business and is preparing to wind down its credit card partnerships.
  • Goldman recently announced it is ending its partnership with General Motors, which will shift its credit card program to Barclays.

The remaining piece of Goldman’s consumer-lending business is its partnership with Apple, which involves around $17 billion in credit card balances. However, this partnership could also result in significant losses if Goldman chooses to sell it to a new issuer.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Alicja Ziaj / Unsplash.