Q3 2024 Earnings Recap: Investment Banking is Back

Investment Banking is posting another strong quarter of earnings and revenue growth, with strong tailwinds in the form of buoyant corporate debt demand and increasing trading volumes. The still slow-moving IPO origination engine feels like the only one yet to fire. Across the bulge brackets, we have seen uniformly positive earnings, with a bit of ongoing operational hiccups detailed at Citi.  

According to the WSJ, “Goldman’s investment banking revenue was $1.87 billion, up 20% from a year ago, led by big increases in debt and equity underwriting revenue.” Even with a tepid IPO market, equity issuance was still up from last year. As Mark Mason (Citi CFO) noted, “in ECM, we saw stronger follow-on activity, which was offset by fewer IPOs amid market volatility in August.”  

Citi ($C US) saw a 44% increase in IB fees, and Jefferies ($JEF US) saw a 35% increase. Evercore ($EVR US) saw similar strength, with 29% YOY increase in net revenues. On a slide from Jefferies’ global investor presentation, the bank suggested 2024 would be the first year of expansion for the global market fee pool (accounting for M&A, equity capital markets activity, and leveraged finance) since 2021. 2022-2023 follows a similar two-year contraction as 2018-2019, 2008-2009, and 2001-2002:  

IPO Market Still in Slumber 

We have written about the “Waiting for Godot” nature of the IPO window in prior pieces. EY’s Global IPO monitor confirmed a deceleration in IPO proceeds for Q3 24 vs Q2 24 but thankfully an uptick in the number of IPOs: 

 
Of course, a big part of new floats are driven by the PE sponsors. With financial conditions easing and market fears put on pause, they are indicating an openness to going to market with portfolio companies, improving their liquidity and distributions (without resorting solely to dividend recaps and continuations). To wit, David Solomon suggested, “Sponsors have been slower to turn on than I would have expected, but they will turn on…they're kind of waiting for growth to bring up some of the values. But I do see an acceleration of activity and I expect it to continue, and there's no fundamental reason why equity volumes ultimately shouldn't run a[t] 10-year averages” (emphasis added). 

Perhaps the strongest pocket of the IPO market has been anything AI- adjacent. According to EY, “Approximately 50 AI companies are currently in IPO registration; about one-third are profitable. This trend reflects sustained investor interest in AI-driven innovations, despite challenges around profitability.” 

Debt Issuance Ramping Up 

According to Breckinridge Capital Advisors’ analysis of Bloomberg data, “total fixed-rate, gross IG supply in excess of $1.5 trillion through three quarters, already exceeded 2023’s 12-month total issuance of about $1.4 trillion.” This broadly ties with data collected by SIFMA, which pegs issuance at $1.57 trillion (33%+ year-over-year): 
 

As we noted a quarter ago, rolling maturities mixed with a lower trajectory for variable-rate issuance (given central bank easing) should continue to propel issuance. According to Bloomberg, “Nearly 70% of this year’s $1 trillion of leveraged loan pricings have been to reprice existing deals.” 

Of course, Moody’s ($MCO US) sounded some caution towards continued issuance strength at Barclays’ GFS summit in September, expecting “November and December [2024] to be more muted simply because our issuers have been advised by their banking partners to go to the market earlier this year.” 

Breckenridge seconded the need for M&A to accelerate in order to support further corporate bond issuance. We’ll have a better sense of these aggregate strengths as the ratings agencies report in the next week.  

Until then, S&P Global ($SPGI US) ties much of this issuance to the need to refinance. As SPGI noted in their 3Q24 credit trends report, “Investment-grade bond issuance increased 16% globally year over year in the first half, and speculative-grade bond issuance rose 71%...more than 75% of U.S. speculative-grade bond issuance and over 60% of leveraged loan issuance was for refinancing,” mirroring the Bloomberg analysis. SPGI reported a banner quarter for ratings revenue, with 36% year-over-year growth for that segment, while MCO had similar revenue growth (+41%) across its Investor Services branch (MIS) driven by strong rated issuance growth, with particular strength in leveraged loans and high yield. 

Artificial Intelligence Mentions in Earnings Calls 

ModuleQ’s Unprompted AI specifically caters to investment banks and private wealth managers, delivering these knowledge workers Unprompted insights to improve productivity and top line generation. This makes AI trends in investment banking a key area of our focus. We note a paucity of AI-related discussion on this quarter’s earnings calls compared to last quarter.  

Most of the discussion points came from Bank of America ($BAC US), Morgan Stanley ($MS US), and JP Morgan ($JPM US). Brian Moynihan provided updates on AI adoption across the consumer bank, noting that “Erica, our AI-enabled virtual assistant, reached 2.4 billion client interactions since its launch.” These product roll-out[s] have resulted in accelerated technology investment. As he noted, “expense increased 7% year-over-year, including continued investments in the business, particularly around technology” (emphasis added). 

Somewhat tangentially, Citi ($C US) was focused on communicating tech simplification, which may be the precursor to AI enablement. Mark Mason (CFO) noted a continued need to simplify and consolidate technology tools while driving efficiency. As he noted, “we talk about starting to see efficiencies and benefits from the investments in the transformation and technology towards the end of 2026” (emphasis added).  

Similarly, Jane Fraser noted, “We've continued to simplify our technology infrastructure, retiring over 450 applications year-to-date and now over 1,250 since our 2022 Investor Day” (emphasis added).  

Technology platform overload is a core “jobs to be done” for ModuleQ, and we believe AI will be an enabling technology for wrangling more from disparate systems while also allowing for more clearheaded consolidation. This is a potential unlocked by AI-driven personalization. 

In terms of AI investment, JP Morgan ($JPM US) continues to be the leader in nominal terms, across the retail bank’s user interface and the backend of various functions.  As Jermey Barnum (CFO) noted, “Expenses of $8.8 billion were down 1% year on year with lower legal expense predominantly offset by higher revenue-related compensation, and growth in place, as well as higher technology spend” (emphasis added). 

As Jamie Dimon noted, “…AI [investment] is going to go up a little bit. And I would put that as a category that's going to generate great stuff over time” (emphasis added). After getting questioned by Mike Mayo last quarter, the bank is demonstrating the strength of their technology platform and the banks’ ability to maintain industry-leading ROTCE based upon consumer comfort with their suite of apps. It will be interesting to see how AI enablement may widen that advantage. 

Anecdotally Dimon demurred when pressed on the bank’s valuation as a potential AI beneficiary, noting, “I'm not that exuberant about thinking even tech valuations or any valuations will stay at these very inflated values. And so I'm just -- we're just quite patient in that.”  

Morgan Stanley Pushes Ahead with Advisers 

Morgan Stanley continues to push ahead with its AI strategy in private wealth. Sharon Yeshaya (MS CFO) noted, “we're also looking at places where we're investing for FAs, new products, new technology that can give them space to go and prosecute new clients, which you see in our net new assets, of course, the course of the quarter” (emphasis added). The ability for AI to enable better top-line (not just productivity) will be an integral part of its adoption in financial services. How does MS think about driving top-line with AI? Yeshava again: 

“we're using technology, different parts of AI and different ways to begin to appropriately match individuals with FAs we think will suit them. That -- those human referrals are double and over 100,000 year-to-date versus what you've seen in the past…So I think that, that's a place where we've invested in technology” (emphasis added). 

When pressed, MS also opened the kimono on their open partnership (pardon the pun) with OpenAI. As Yeshava noted, “…there are new places that we're using AI that we've launched and we've discussed over the course of the last two quarters or so. One is we obviously do have a tool where FAs can use and speak to our research portal, so to speak, and understand that AI will basically read everything and then can help you answer different questions associated with what's already been published in terms of that volume of data” (emphasis added).  

The ability to use voice is clearly a focus for busy FAs, especially as they may be on the road meeting with clients and prospects, needing to digest meeting notes and follow-ups on the fly. Given the size and scope of the enterprise, it’s important for the bank’s ability to seamlessly integrate workflows with the multitudes of research put out by various arms of the bank. Connecting these disparate systems for greater cohesion and efficiency will be a key driving point for the street’s adoption of AI. 

As Yeshava continued, “In addition to that, as we've moved forward, we can have tools like debrief where an individual, of course, gaining permission in a meeting can use what they've heard in a meeting through AI translate languages, et cetera, summarize and then be able to send out e-mails as follow-ups based on the conversations had in those meetings with a draft.”  

This focuses on the “jobs to be done” by their financial advisors across workflows where AI enablement leads to clear time savings with mitigated downside risk. Meeting distillation is an area of “lower hanging fruit” for LLMs (an area where there is already a maturing competitive landscape). 

Ted Pick chimed in on broader AI vision, summarizing much of what we noted above: “it's going to be a tool at the very least that is going to help inform FAs on what is relevant at any given moment... they are going to have access to information across a whole bunch of data sets, ongoing conversations and interactions that are going to allow for crisper and more effective conversations with their clients.” 

The Challenge of “Industrializing” AI Technology 

In our series entitled The Future is Now, we walk through the eager anticipation many banks had 12 months ago with their AI roadmaps, and the challenges they have had navigating a smooth adoption. Since then, there has been considerable progress across many banks but also a recognition that new muscles will have to be developed in order to implement this technology.  

We call this the challenge of industrializing AI, where consumer widgets and sandboxed demos show significant promise, but the actual implementation is a much harder route, especially for financial services.  

We’ll be writing more on this subject in the coming weeks, so stay tuned. Until then, we’ll keep our ears open as the boutique banks continue to report.  

We look forward to tracking these trends on the blog each quarter!