After a two-year slump, investment banking looks like it's entering the early stages of a recovery. Investment banks reported earnings growth of double-digit percentages in the first quarter, driven by strong initial public offering (IPO) markets and a pick-up in debt underwriting. Here are three stocks to buy today to capitalize on this recovery.
1. Goldman Sachs is a direct play on investment banking
Goldman Sachs (GS 1.74%) is the closest thing to a pure-play investment bank that you can invest in. It wasn't entirely by choice. The bank made a push into consumer banking in 2016 and aimed to take in deposits and build a more resilient earnings stream across cycles.
That push didn't fare well, and it began winding down its consumer business last year.
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Therefore, Goldman Sachs should be one of the biggest beneficiaries of active capital markets, which was the case in the first quarter. The company's earnings per share (EPS) more than doubled from the fourth quarter and grew 27%, compared to the same quarter last year.
Investment banking fees of $2 billion increased 32% from last year, with good growth in advisory, equity underwriting, and debt underwriting, compared with last year. Chief Executive Officer David Solomon noted several large IPOs, including Reddit, which were well-received and showed an increased appetite for risk from investors.
In addition, corporate debt refinancing was a common theme. Solomon sees a more accommodating issuance backdrop and more financing for acquisition as two things that have the bank expecting "solid levels of debt underwriting activity to continue this year."
2. Morgan Stanley's CEO says we're in the early stages of a recovery
Morgan Stanley (MS 1.22%) is another bank with sizable investment banking operations. However, it differs from Goldman because it has built large asset and wealth management businesses. These more diversified earnings can help stabilize the bank's business during lulls in investment banking.
Morgan Stanley's EPS surged 138% from the fourth quarter, and increased 19% compared with the same quarter last year. Its earnings revealed mixed results within investment banking. For example, mergers and acquisitions (M&A) were down, and advisory revenue fell 28%. However, equity underwriting and debt underwriting revenue increased 113% and 37%, respectively, compared to the same period last year.
Ted Pick took over as CEO in January after James Gorman, who led the bank since 2010, stepped down. Pick told investors that, "The pipeline is clearly growing" and that we are now in the "early innings of a multiyear M&A cycle" that could last three to five years. That, coupled with recovering equity and debt underwriting markets, could be a powerful tailwind for investment banking revenues.
3. Citigroup's efficiency push could get a boost from investment banking
Citigroup (C 1.00%) may not be commonly known for its investment bank operations, but it raked in $903 million in revenue in the first quarter. A rebound in investment banking and Citigroup's ongoing initiatives to become more efficient make it an appealing investing opportunity.
In 2021, Jane Fraser became Citigroup's CEO. Fraser's primary focus became streamlining operations and improving the bank's profitability.
Citigroup struggled with its sprawl and last year announced it would wind down 13 global consumer franchises. The bank recently restructured its management team and will continue to lower costs to improve its profitability. Its cost-cutting initiatives have some analysts very optimistic about the bank.
Citigroup's investment banking revenue increased 35% from last year, thanks to the strength in equity and debt underwriting. Like Morgan Stanley, Citi's advisory revenue dropped because of fewer M&A deals during the quarter. However, debt issuance surged. Citigroup Chief Financial Officer Mark Mason told investors that "improved market sentiment led to an increase in issuance activity, particularly investment grade, which is running at near-record levels."
Fraser noted, "We are cautiously optimistic that we could see a measured reopening of the IPO market in the second quarter." She expressed optimism, noting that, "Corporate sentiment is quite positive."
This is a welcome sign for investment banks that have endured several years of sluggish growth. It makes these banks compelling value stocks to buy today.
