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3 Investment Bank Stocks Watch as Industry Navigates Challenges
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Gradually changing operating environment as the macroeconomic headwinds dissipate will support the Zacks Investment Bank industry. While near-term concerns persist, the industry players see green shoots in corporate debt and equity issuances and deal-making activities.
Also, heightened client activity in the trading business is expected to continue as uncertainty-induced volatility will likely persist in the near term. While technology-related expenses might impede bottom-line growth to some extent, they will eventually lead to improved operating efficiency. These factors will likely aid industry players like Morgan Stanley (MS - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Evercore Inc. (EVR - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).
3 Major Themes Shaping the Future of the Investment Bank Industry
Green Shoots Visible in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting, and deal-making activities almost came to a grinding halt at the start of 2022. A host of factors, including geopolitical tensions, significant monetary policy tightening worldwide to control inflation and probable economic slowdown/recession, acted as headwinds for M&As across the globe. These factors also hampered debt and equity issuance volumes.
With the inflation moderating and chances of recession over the next 12 months coming down, green shoots in advisory and underwriting businesses are visible. Despite near-term concerns, industry players are likely to witness a modest improvement in capital market activities. Thus, as the macroeconomic and geopolitical ambiguity is over, revenues from advisory and underwriting operations are expected to trend upward.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. The current situation will likely persist this year as markets are still grappling with high global inflation, high-interest rate regimes and other geopolitical matters. Hence, trading volumes will likely remain decent, driven by solid client activities in equity and fixed-income businesses, thereby boosting industry players’ trading income.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising are likely to support the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to support clients with infrastructure development and new platforms. While investment banks will likely face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Zacks Industry Rank Indicates a Bright Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #109, which places it in the top 44% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may keep on your radar, let’s look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively declined 16.7%, the S&P 500 composite has lost 1.2% and the Zacks Finance sector 6.3%.
Two-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.45X, above the median level of 2.83X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.38X and the median level is 10.06X.
Price-to-Tangible Book Ratio (TTM)
Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.36X and the median level of 4.10X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Investment Banks to Keep an Eye on
Morgan Stanley: This Zacks Rank #3 (Hold) stock operates globally as an investment banking, securities and investment management company. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Morgan Stanley has been undertaking several initiatives aimed at increasing reliable revenue sources. Strategic expansion efforts, including the acquisitions of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix.
In a move that signals their commitment to further collaboration and innovation, Mitsubishi UFJ Financial Group, Inc. and Morgan Stanley announced the launch of "Alliance 2.0". This will see combined Japanese equity research, sales and execution services for institutional clients at Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities. Also, their equity underwriting business will be rearranged between the two brokerage units. These efforts will solidify the company’s position in Japan’s market.
Though steadily increasing expenses and near-term weakness in IB performance are headwinds, a strong balance sheet, higher rates and investment-grade long-term ratings from leading credit rating agencies are likely to continue aiding growth.
With a market cap of $142.1 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have lost 11.6% in the past six months. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $5.83 in the past week.
Price and Consensus: MS
Goldman: This Zacks Rank #3 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Like Morgan Stanley, the key to the company’s financial stability is its business restructuring efforts. GS intends to refocus its business on its core strengths of IB and trading while scaling back its consumer banking footprint. As part of this effort, the company signed an agreement to divest its Personal Financial Management unit to Creative Planning. The sale will result in a gain and is expected to be completed in the fourth quarter of 2023. Also, Goldman has been looking for bidders for the sale of its consumer lending platform, GreenSky.
Though subdued IB business and rising expenses are major near-term concerns, a solid position in announced and completed M&As globally and signs of growing M&A and underwriting pipelines are likely to support Goldman's IB revenues over time.
Goldman has a market cap of $107.9 billion. Over the past six months, the company’s shares have declined 6.5%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $25.74 in the past seven days.
Price and Consensus: GS
Evercore: This Zacks Rank #3 company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2022 due to lower advisory fees, the same witnessed a CAGR of 7.6% over the last four years (ended 2022). Despite several near-term challenges, the company’s efforts to boost its client base in advisory solutions, diversify revenue sources, robust pipeline and expand geographically will aid revenues going forward.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $5.4 billion. In the past six months, shares of the company have increased 7.7%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $6.83 over the past week.
Price and Consensus: EVR
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3 Investment Bank Stocks Watch as Industry Navigates Challenges
Gradually changing operating environment as the macroeconomic headwinds dissipate will support the Zacks Investment Bank industry. While near-term concerns persist, the industry players see green shoots in corporate debt and equity issuances and deal-making activities.
Also, heightened client activity in the trading business is expected to continue as uncertainty-induced volatility will likely persist in the near term. While technology-related expenses might impede bottom-line growth to some extent, they will eventually lead to improved operating efficiency. These factors will likely aid industry players like Morgan Stanley (MS - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Evercore Inc. (EVR - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).
3 Major Themes Shaping the Future of the Investment Bank Industry
Green Shoots Visible in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting, and deal-making activities almost came to a grinding halt at the start of 2022. A host of factors, including geopolitical tensions, significant monetary policy tightening worldwide to control inflation and probable economic slowdown/recession, acted as headwinds for M&As across the globe. These factors also hampered debt and equity issuance volumes.
With the inflation moderating and chances of recession over the next 12 months coming down, green shoots in advisory and underwriting businesses are visible. Despite near-term concerns, industry players are likely to witness a modest improvement in capital market activities. Thus, as the macroeconomic and geopolitical ambiguity is over, revenues from advisory and underwriting operations are expected to trend upward.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. The current situation will likely persist this year as markets are still grappling with high global inflation, high-interest rate regimes and other geopolitical matters. Hence, trading volumes will likely remain decent, driven by solid client activities in equity and fixed-income businesses, thereby boosting industry players’ trading income.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising are likely to support the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to support clients with infrastructure development and new platforms. While investment banks will likely face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Zacks Industry Rank Indicates a Bright Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #109, which places it in the top 44% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may keep on your radar, let’s look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively declined 16.7%, the S&P 500 composite has lost 1.2% and the Zacks Finance sector 6.3%.
Two-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.45X, above the median level of 2.83X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.38X and the median level is 10.06X.
Price-to-Tangible Book Ratio (TTM)
Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.36X and the median level of 4.10X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Investment Banks to Keep an Eye on
Morgan Stanley: This Zacks Rank #3 (Hold) stock operates globally as an investment banking, securities and investment management company. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Morgan Stanley has been undertaking several initiatives aimed at increasing reliable revenue sources. Strategic expansion efforts, including the acquisitions of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix.
In a move that signals their commitment to further collaboration and innovation, Mitsubishi UFJ Financial Group, Inc. and Morgan Stanley announced the launch of "Alliance 2.0". This will see combined Japanese equity research, sales and execution services for institutional clients at Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities. Also, their equity underwriting business will be rearranged between the two brokerage units. These efforts will solidify the company’s position in Japan’s market.
Though steadily increasing expenses and near-term weakness in IB performance are headwinds, a strong balance sheet, higher rates and investment-grade long-term ratings from leading credit rating agencies are likely to continue aiding growth.
With a market cap of $142.1 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have lost 11.6% in the past six months. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $5.83 in the past week.
Price and Consensus: MS
Goldman: This Zacks Rank #3 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Like Morgan Stanley, the key to the company’s financial stability is its business restructuring efforts. GS intends to refocus its business on its core strengths of IB and trading while scaling back its consumer banking footprint. As part of this effort, the company signed an agreement to divest its Personal Financial Management unit to Creative Planning. The sale will result in a gain and is expected to be completed in the fourth quarter of 2023. Also, Goldman has been looking for bidders for the sale of its consumer lending platform, GreenSky.
Though subdued IB business and rising expenses are major near-term concerns, a solid position in announced and completed M&As globally and signs of growing M&A and underwriting pipelines are likely to support Goldman's IB revenues over time.
Goldman has a market cap of $107.9 billion. Over the past six months, the company’s shares have declined 6.5%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $25.74 in the past seven days.
Evercore: This Zacks Rank #3 company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2022 due to lower advisory fees, the same witnessed a CAGR of 7.6% over the last four years (ended 2022). Despite several near-term challenges, the company’s efforts to boost its client base in advisory solutions, diversify revenue sources, robust pipeline and expand geographically will aid revenues going forward.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $5.4 billion. In the past six months, shares of the company have increased 7.7%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $6.83 over the past week.
Price and Consensus: EVR
