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3 Investment Banks to Watch Despite Industry-Wide Challenges
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A challenging operating environment, given the subdued industry-wide corporate debt and equity issuances and deal-making activities, will keep hampering the Zacks Investment Bank industry’s prospects. Hence, these are expected to adversely impact the top-line growth.
Yet, heightened client activity in the trading business is expected to continue as the uncertainty-induced volatility is likely to persist in the near term. While costs related to technological upgrades might impede bottom-line growth, these will eventually lead to improved operating efficiency. These factors will keep aiding 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 Key Themes to Keep an Eye on in the Investment Bank Industry
Weakness in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost crashed since last year. A number of factors, including geopolitical tensions, global supply-chain disruptions, aggressive monetary policy tightening worldwide to control inflation and potential economic slowdown/recession, continue to act as headwinds for global M&As. These factors also hampered debt and equity issuance volumes.
With inflation seeming to be cooling down gradually and the market participants now expecting a “soft landing” of the U.S. economy, green shoots in advisory and underwriting businesses are visible as the deal pipeline looks healthy. But the macroeconomic and geopolitical ambiguity remains a major concern, and till this is over, it will be a bumpy ride for investment banks. Hence, soft underwriting and advisory businesses are expected to keep hurting industry players’ revenue growth.
Trading Business Offers Some 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. So, 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 help 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 Grim 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 #207, which places it in the bottom 18% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 31.1% lower.
Before we present a few stocks that you may want to keep on the radar despite industry-wide challenges, let’s take a 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 22.1%, the S&P 500 composite has lost 4.2% and the Zacks Finance sector 9.5%.
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 3.89X, above the median level of 3.03X, 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 9.92X and the median level is 10.09X.
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 4.45X and the median level of 4.14X 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 initiatives. 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, in July, 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 the IB business 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 $128.8 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have lost 5.5% in the past six months. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $5.58 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, in October, the company entered into an agreement with a consortium led by investment firm Sixth Street Partners to divest its consumer lending platform, GreenSky, and associated loans. Further, in August, it inked a deal to divest its Personal Financial Management unit to the leading Registered Investment Advisor, Creative Planning.
Goldman also aims to cease unsecured loan offerings to consumers through Marcus. In the first half of 2023, it sold substantially all of Marcus’s loan portfolio instalments.
Though subdued IB business and rising expenses are major near-term concerns, robust client engagement, backed by digital disruption and transformation trends, signs of growing M&A and underwriting pipelines; and global expansion efforts will support Goldman’s prospects over time.
Goldman has a market cap of $110.4 billion. Over the past six months, the company’s shares have rallied 4.5%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $22.98 in the past seven days.
Price and Consensus: GS
Evercore: It is a premier global independent investment banking advisory firm. This Zacks Rank #3 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. Muted global M&A and underwriting activities on the back of macroeconomic and geopolitical concerns are expected to keep hurting IB net revenues in the near term. Nonetheless, the company’s efforts to boost its client base in advisory solutions, diversify revenue sources and expand geographically will aid revenues going forward.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are worrisome, 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 $5.5 billion. In the past six months, shares of the company have jumped 34.1%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $6.25 over the past week.
Price and Consensus: EVR
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3 Investment Banks to Watch Despite Industry-Wide Challenges
A challenging operating environment, given the subdued industry-wide corporate debt and equity issuances and deal-making activities, will keep hampering the Zacks Investment Bank industry’s prospects. Hence, these are expected to adversely impact the top-line growth.
Yet, heightened client activity in the trading business is expected to continue as the uncertainty-induced volatility is likely to persist in the near term. While costs related to technological upgrades might impede bottom-line growth, these will eventually lead to improved operating efficiency. These factors will keep aiding 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 Key Themes to Keep an Eye on in the Investment Bank Industry
Weakness in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost crashed since last year. A number of factors, including geopolitical tensions, global supply-chain disruptions, aggressive monetary policy tightening worldwide to control inflation and potential economic slowdown/recession, continue to act as headwinds for global M&As. These factors also hampered debt and equity issuance volumes.
With inflation seeming to be cooling down gradually and the market participants now expecting a “soft landing” of the U.S. economy, green shoots in advisory and underwriting businesses are visible as the deal pipeline looks healthy. But the macroeconomic and geopolitical ambiguity remains a major concern, and till this is over, it will be a bumpy ride for investment banks. Hence, soft underwriting and advisory businesses are expected to keep hurting industry players’ revenue growth.
Trading Business Offers Some 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. So, 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 help 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 Grim 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 #207, which places it in the bottom 18% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 31.1% lower.
Before we present a few stocks that you may want to keep on the radar despite industry-wide challenges, let’s take a 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 22.1%, the S&P 500 composite has lost 4.2% and the Zacks Finance sector 9.5%.
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 3.89X, above the median level of 3.03X, 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 9.92X and the median level is 10.09X.
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 4.45X and the median level of 4.14X 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 initiatives. 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, in July, 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 the IB business 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 $128.8 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have lost 5.5% in the past six months. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $5.58 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, in October, the company entered into an agreement with a consortium led by investment firm Sixth Street Partners to divest its consumer lending platform, GreenSky, and associated loans. Further, in August, it inked a deal to divest its Personal Financial Management unit to the leading Registered Investment Advisor, Creative Planning.
Goldman also aims to cease unsecured loan offerings to consumers through Marcus. In the first half of 2023, it sold substantially all of Marcus’s loan portfolio instalments.
Though subdued IB business and rising expenses are major near-term concerns, robust client engagement, backed by digital disruption and transformation trends, signs of growing M&A and underwriting pipelines; and global expansion efforts will support Goldman’s prospects over time.
Goldman has a market cap of $110.4 billion. Over the past six months, the company’s shares have rallied 4.5%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $22.98 in the past seven days.
Evercore: It is a premier global independent investment banking advisory firm. This Zacks Rank #3 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. Muted global M&A and underwriting activities on the back of macroeconomic and geopolitical concerns are expected to keep hurting IB net revenues in the near term. Nonetheless, the company’s efforts to boost its client base in advisory solutions, diversify revenue sources and expand geographically will aid revenues going forward.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are worrisome, 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 $5.5 billion. In the past six months, shares of the company have jumped 34.1%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $6.25 over the past week.
Price and Consensus: EVR
