Investment Bank Industry Outlook: Prospects Look Bright


The Zacks Investment Bank industry consists of U.S. firms that provide various financial products and services including advisory-based financial transactions to corporations, governments and financial institutions worldwide. These institutions began as partnership firms that were focused on initial public offerings (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions, and have evolved into providers of various services, including securities research, proprietary trading, and investment management.

These firms work mainly through three product segments — investment banking (which includes mergers and acquisitions, advisory services and securities underwriting), asset management, and trading and principal investments (which covers proprietary and brokerage trading).

An advisor providing investment banking services in the United States must carry a broker-dealer license and abide by U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulations.

The passage of the Dodd-Frank Act of 2010 post the 2008 financial crisis put restrictions on certain investment banking activities such as proprietary trading. However, considering the need for better business flexibility in the current economic scenario, these restrictions are being eased.

Here are the three major themes in the industry:

  • Client activity in the trading business depends on the prevalent macroeconomic and geopolitical conditions. Higher inflation anticipation, tightening of monetary policy, escalating U.S.-China trade war and some other geo-political tensions have incited volatility and drove client activity over the past few months. Improving economy and resilient investor sentiment should keep the trading business momentum alive.


  • M&A activities, which form an important part of investment banking business, could keep rising on the back of steady economic growth and increasing corporate earnings due to tax reforms. Although trade-war worries and rising interest rates in the United States could curb the growth, the M&A deal volume is anticipated to increase. Moreover, steady IPO activities, backed by sturdy equity markets and decent corporate earnings, should work in favor in the quarters ahead.


  • Innovative trading platforms, investments in technology and advertising are projected to support the overall backdrop for investment banks. Firms are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms.

Zacks Industry Rank Indicates Solid Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.

The Zacks Investment Bank industry currently carries a Zacks Industry Rank #62, which places it at the top 24% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has remained in the top half of the rank list over the past six weeks.


The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of strong earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Since November 2017, the industry’s earnings estimates for the current year have been revised upward by 19.3%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags on Shareholder Returns

The Zacks Investment Bank industry, a 20-stock group within the broader Zacks Finance Sector, has underperformed both the S&P 500 and its own sector over the past two years.

While the stocks in this industry have collectively gained 6.1%, the Zacks S&P 500 composite and Zacks Finance sector have rallied 22% and 12%, respectively.

Two-Year Price Performance

Industry’s Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is the most appropriate multiple for valuing finance companies because of large variations in their earnings results from one quarter to the next.  


The industry currently has a trailing 12-month P/TBV of 2.47X, above the median level of 2.39X, over the past five years. This compares with the highest level of 3.26X and lowest level of 1.57X over this period.

However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.12X and the median level is 7.47X.

Price-to-Tangible Book Ratio (TTM)


The Zacks Finance sector’s trailing 12-month P/TBV ratio of 2.61X and the median level of 3.01X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)


Bottom Line

Market-volatility driven growth in trading business may not continue for long, as volatility might wane once the global and domestic economy issues stabilize. Also, expenses on technology and business diversification might curb top-line growth in the coming period.

Nonetheless, investment banking business is likely to prosper on increased IPO and M&A activities.


One should particularly consider betting on investment bank and broker stocks that depict an upbeat earnings outlook. We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank #2 (Buy) that investors may consider betting on.

(You can see the complete list of today’s Zacks #1 Rank stocks here)

E*TRADE Financial Corporation (ETFC - Free Report) : The stock of this New York, NY-based bank has appreciated 11.9% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 6.9% upward, in the last 60 days. The stock currently sports Zacks Rank of 1.


Price and Consensus: ETFC


Greenhill & Co., Inc. : The consensus EPS estimate for this New York, NY-based bank moved up 18.9% for the current year, over the last 60 days. This Zacks #1 Ranked stock has rallied 23.4% in a year’s time.


Price and Consensus: GHL


TD Ameritrade Holding Corp. (AMTD - Free Report) : The stock of this Omaha, NE-based bank has gained 6.4% over the past year. The Zacks Consensus Estimate for 2018 EPS moved 2.8% north over the last 60 days. The stock currently carries a Zacks Rank #2.


Price and Consensus: AMTD


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