Sector powerhouses such as Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Goldman Sachs (NYSE:GS) have all reported growth in investment banking revenue for the second quarter, but Goldman clearly outperformed the others. What caused the tremendous growth for Goldman and will it continue?
JPMorgan and Bank of America did pretty well
JPMorgan Chase, the number one investment bank by fee revenue, earned $1.8 billion in investment banking fees for the quarter, up 3% year-over-year. While this is not spectacular growth, consider that advisory fees rose by a staggering 31% and equity underwriting fees grew by 4%.
The reason overall fee revenue growth wasn't more impressive was weakness in the fixed-income market, as debt underwriting fees fell by 6%. This disproportionately weighed on the overall results, as debt underwriting makes up half of JPMorgan's investment banking fee revenue.
Bank of America, the second-largest investment bank by fee revenue, saw similar results, as fee revenue rose by a little more than 2% and produced a company record in equity underwriting fees.
Goldman is in another league
Ranking number one worldwide in mergers & acquisitions, as well as IPOs and other equity offerings, which were the other two's strong points, we wouldn't expect the sectorwide lull in fixed-income underwriting to affect Goldman Sachs quite as much. And we'd be right.
Goldman's net investment banking revenue grew by an impressive 15% from the previous year as underwriting revenue popped 20%. Equity underwriting revenue grew a staggering 47% and even debt underwriting revenue grew, in contrast with peers.
Strengths and weaknesses
The fixed-income business has been weak across the board so far in 2014, both in terms of trading revenue and underwriting fees.
The strong points are what we might expect while the stock market is at record highs: IPO and M&A activity. As long as the market is strong, it is easier for companies to build up investor interest in potential IPOs. And the low-interest rate environment and high consumer confidence makes it more attractive for companies to make acquisitions.
What can we expect going forward?
The drop in fixed-income revenue should be a temporary one. The sluggish trading volumes and new financial regulations are both making it difficult for banks to turn a profit, but the institutions seem optimistic that it'll work out in the long run. Goldman Sachs said that economic growth will drive activity going forward, and the current fixed-income environment has been driven by the current economic climate.
As far as IPOs and M&A activity, it depends on how long this rally in the market lasts and what interest rates do over the next few years.
IPO activity will remain very strong as long as the market stays at near-record levels, and we've already seen significant activity in the first few weeks of the third quarter with GoPro and El Pollo Loco going public. And, M&A activity will stay strong as long as interest rates are low, and we're seeing tremendous activity such as Reynolds American's buyout of Lorillard. One survey shows experts predict strong M&A activity to continue throughout 2014.
However, if we see a sudden market correction like many experts are calling for, or if interest rates climb faster than expected, the banks could definitely take a hit in their investment banking revenue. For now, investment banking is strong and will remain strong as long as the current conditions hold out.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.