Investment Banking Business Slides in Q4

Investment banking business at Wall Street banks took a dive in the fourth quarter, spurring thousands of job cuts.

Mergers, acquisitions, and initial public offerings fell off at Morgan Stanley and Goldman Sachs, causing a decline in profits. Goldman Sachs fired more than 3,000 employees in its biggest round of job cuts since the 2008 financial crisis, and Morgan Stanley cut around 1,600. Global banks will lose more than 6,000 jobs in total, according to Reuters.

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In 2022, the Federal Reserve’s interest rate hikes disrupted markets, and global investment banking revenue plunged more than 50% from 2021, according to Dealogic.

But an anticipated slowing of the Fed’s rate hikes in 2023 will likely contribute to a rebound in investment banking profits in 2023.

"I am highly confident that when the Fed pauses [rate hikes], deal activity and underwriting activity will go up," said Morgan Stanley Chief Executive Officer James Gorman on the bank's most recent earnings call.

When there is a "policy pivot of peaking inflation, something that allows the CEOs that are actually having those conversations in boardrooms to have more confidence," the pipeline of deals may be more active, said Morgan Stanley Chief Financial Officer Sharon Yeshaya. CEOs were also looking for "price clarity and valuation certainty," she said.

It may take until the second half of 2023 to see improvement, Goldman Sachs CEO David Solomon said, and the first sign could be in the investment-grade debt market. "It takes a period for people to adjust," he said, perhaps about "four to six quarters."

Top bankers said they expect an M&A recovery in the second half of 2023, with investors preparing to fund transactions and large companies earning solid profits looking to diversify. They are just waiting for economic uncertainty to wane before jumping in.

Goldman's investment bankers will do well if markets recover. The company has been the top global M&A adviser by revenue for the past 20 years, followed by JPMorgan, according to Dealogic data.