Wall Street’s big banks are poised to report fourth quarter earnings this week, which are expected to reveal strong investment banking and trading results, Moody’s Ratings says.
The large U.S. investment banks — including JP Morgan, Goldman Sachs, Bank of America Corp., Citigroup Inc., Morgan Stanley and Wells Fargo & Co. — are slated to start reporting their latest quarterly earnings on Jan. 15.
When they do, Moody’s is expecting to see solid revenues from their investment banking and trading operations, based on the trends in quarterly industry data on securities issuance, mergers and acquisitions and trading activity.
“Debt issuances, equity issuances and M&A completions increased broadly in Q4, which should boost investment banking revenue compared with a year ago,” the rating agency said.
In particular, Moody’s reported that U.S. debt offering volumes were higher in the fourth quarter of 2024, compared with the same period in 2023, with a “substantial increase” in leveraged loans.
“Year-on-year growth in the mainly floating-rate leveraged loan market was significant, reaching record levels and benefited from very strong refinancing activity,” the report said.
“Investment-grade debt issuance was also solid, with bond and loan issuance volume increasing slightly year on year,” it noted. Meanwhile, “issuance of predominantly fixed-rate, high-yield bonds slowed from the previous three quarters but still posted a strong year-on-year increase for the seventh consecutive quarter.”
Additionally, secondary equity offering volumes rose, and initial public offering volumes increased year-over-year in the fourth quarter, even as they remained relatively weak on a historical basis, it said.
Similarly, M&A deal activity was higher in Q4, both on a quarter-over-quarter and year-over-year basis.
On the trading side, volumes were higher too, amid elevated market volatility, “pointing to stronger trading revenue compared with a year ago, but mostly within equities,” the report said.
Moody’s noted that banks’ revenue from trading in equities and equity derivatives is correlated with trading volumes and client activity — and that banks can also benefit from wider trading spreads and increased market volatility too.
In the fourth quarter, equity trading volumes rose (including off-exchange and dark-pool trading) to near-record levels, while equity options trading volumes did hit record highs, Moody’s reported.
Alongside these high volumes, average implied volatility reached its highest level in two years, and average spreads on S&P 500 stocks widened to its highest level since the first quarter of 2020, it noted.
“Volatility and spreads are generally positively correlated and can boost revenue for banks that are able to navigate the markets and provide liquidity,” it said.
At the same time, Moody’s also reported that while trading volumes in many fixed income, currencies and commodities (FICC) options and futures products were strong in the fourth quarter, volumes for certain commodities and interest rate products eased a bit from record third-quarter highs. Trading in prominent credit ETFs also declined from previous quarters and year on year.
Implied volatility across fixed-income markets was also lower in the fourth quarter, it noted.
Overall, Moody’s said that it expects fourth-quarter FICC sales and trading revenue to be weaker than in the third quarter, and to post “limited improvements” on a year-over-year basis.