JPMorgan Chase and Morgan Stanley threw a veil on Wall Street after they reported a bigger-than-expected decline in second-quarter earnings, marking the end of the pandemic-era earnings boom.
Wall Street banks made record numbers during the coronavirus pandemic by working on a flurry of mergers and acquisitions, public exchanges and special-purpose takeover companies.
But the business pipeline, especially the flow of IPOs, has slowed significantly since the beginning of the year as investors move away from Spacs and money-losing start-ups.
It was the first lost revenue for JPMorgan — the largest U.S. lender by assets and industry — or Morgan Stanley since early 2020.
“In terms of prospects [for investment banking]while our existing pipeline remains healthy, turning the deal backlog could prove challenging if the current headwinds persist,” JPMorgan Chief Financial Officer Jeremy Barnum said in an interview with analysts.
Banks also face a challenging regulatory environment. JPMorgan said it had “temporarily suspended” its share buybacks after the Federal Reserve hit it with a higher capital requirement†
And Morgan Stanley said it expects to pay a $200 million fine to US regulators in connection with a federal investigation into its staff’s use of unapproved communication channels. JPMorgan paid that amount of fines to solve a similar case.
JPMorgan reported second-quarter net income of $8.2 billion, or $2.76 per share, down nearly 30 percent from $11.5 billion, or $3.78 per share, in the same period last year. . Analysts had forecast quarterly net income of $8.5 billion or $2.90 per share, according to Bloomberg’s consensus data.
At Morgan Stanley, net income applicable to shareholders also fell 30 percent to $2.4 billion, which was below estimates of $2.75 billion.
Both banks suffered larger declines in investment banking revenues than analysts had anticipated, as well as losses on loans they could not yet resell to third parties.
The bleak reports set a bleak tone for US banks’ earnings seasons, with Citigroup set to release the results on Friday, followed by Goldman Sachs and Bank of America on Monday.
Shares of JPMorgan fell about 4.5 percent during early afternoon trading in New York, while Morgan Stanley lost 0.6 percent. Goldman was down about 3 percent and BofA was down 2.8 percent.
During the quarter, JPMorgan and Morgan Stanley took a hit as they were unable to sell debt they had underwritten to fund leveraged buyouts to investors.
JPMorgan said it had taken $257 million in markdowns on loans for sale, while Morgan Stanley said it had taken $282 million in mark-to-market losses.
For JPMorgan, the poor performance in investment banking took the shine off an increase in the amount of money it generates from lending, which has risen sharply as the Fed raises interest rates.
The bank reported net interest income — the difference between what it pays in deposits and what it earns in loans and other assets — of $15.1 billion. That was 19 percent more than a year earlier, the largest increase in more than a decade.
JPMorgan raised its target for net interest income for 2022, excluding its market activities, to over $58 billion, from over $56 billion earlier†
Analysts at Wells Fargo said JPMorgan’s lost profit was a reflection of Wall Street’s banking activities, which have been dampened in part by the strength of the Main Street banking sector.
JPMorgan and Morgan Stanley reported an increase in revenue in their trading divisions as investors traded heavily amid volatile financial markets.