When Morgan Stanley reported earnings on Tuesday, it wasn't the first bank to make hay over the coming "investment-banking rebound." Top executives up and down across Wall Street have been talking for days about their predictions that Wall Street's bread-and-butter business of advising and financing deals could soon come roaring back.
So when it came time for noted Wells Fargo Securities bank stock researcher Mike Mayo to ask a question, he zeroed in on the issue at the top of many Wall Street watchers' minds.
"Why is this time real?" Mayo asked about a possible resurgence for deal-making.
After all, Wall Street leaders have been vowing a return of the M&A market since the go-go days of investment-banking activity in 2020 and 2021 receded in lieu of Federal Reserve policies designed to slow the economy and cool inflation. Or, if they weren't outwardly promising, they were certainly hoping as much. And the parade of optimism has only heated up this year as investment-banking revenues have started the slow climb from historical lows.
Rather than opine on "pipelines," "dialogues," and other ephemeral signs of a recovery, however, Morgan Stanley's CEO Ted Pick answered the question with some degree of specificity. He said competitions for investment-banking business, known in industry parlance as "bake offs," are up significantly, among other indications that the recent uptick in deal activity will continue.
"We're seeing bake-offs running at triple-plus the year-over-year rate that they were at for sectors and for some of our client groups," Pick said. "We are quite convicted on this call," Pick continued. "I think we can now expect broader corporate finance activity to quicken, whether that is across the corporate community or sponsors or other institutions," he said.
Pick also said demand for convertible bonds, which are so named because they can often be converted to stock, is "up significantly" — which he translated as a good sign for dealmaking. Pick said that an upswing in demand for convertibles has historically preceded a pickup in public issuances and, ultimately, mergers.
"I think we're in the early stages of a multiyear investment banking-led cycle," Pick said.
IB revenues surging
Like many of the other Wall Street banks that reported earnings in recent days, Morgan Stanley saw investment-banking revenues soar in the second quarter. It notched investment-banking revenues of $1.6 billion, up 51% versus the same period last year, with advisory revenues of nearly $600 million (versus $455 million the year before), thanks to "higher completed M&A transactions."
The bank also reported greater revenues stemming from advising on public issuances and convertible offerings.
Pick's enthusiastic comments echoed that of his peer CEOs at Goldman Sachs, Bank of America, and more.
"From what we're seeing, we are in the early innings of the capital markets and M&A recovery," Goldman CEO Solomon told shareholders and analysts on Monday. Solomon conceded that the current M&A market is "still well below" historical 10-year averages and that private-equity activity has yet to regain steam, but said conversations with clients suggest a rebound is imminent.
"I think, especially given the environment that we're in, that you're going to see over the next few quarters in 2025 kind of a re-acceleration of that sponsor activity," he said, referring to private-equity acquisitions.
The biggest outlier might be behemoth JPMorgan Chase, whose CFO spent much of the bank's earning call on Friday explaining some of the risks that could derail the current investment-banking rebound. Of course, JPMorgan's earnings tell another story: The bank saw investment-banking fees of $2.3 billion rise more than 50% of last year and 18% over the previous quarter, when signs of a rebound first kicked off.
And as Pick said on Tuesday, Wall Street is getting excited about more than just traditional dealmaking, but also the financing and other hedging strategies that come with companies getting off the sidelines.
"It's not just the straight M&A advisor or the straight IPO," Pick explained. "It'd also be bespoke offerings in the private-public space, interest rate and foreign exchange hedging, and the other ornaments on the investment banking tree that a couple of the leading global investment banks can bring."
Speaking to Mayo, he said: "Certainly, I take your point that there has been a number of quarters on the promise. But I think as we get into 2025 and the election coming, and then the election behind us, we should see that activity continue on a sustainable pace."
