According to a Deutsche Bank Markets Research “Bank Cheat Sheets” report dated June 25th, mergers and acquisition activity is up significantly this year, which means major investment banks like Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) are likely to see increased earnings.
Fixed income (FICC) trading remains weak
The DB report highlights that trading activity fixed income instruments, currencies, and commodities markets remain very sluggish, and are reflect a 20-25% decline from 2013 levels. Deutsche Bank Analysts Matt O’Connor and colleagues did note that there was a slight pick up in FICC trading activity in the month of June which could augur a turnaround, but the trading volume in April and May was very low.
M&A activity up significantly this year
Higher profits for IBs, especially Goldman Sachs
The DB report argues this significant pick up in M&A activity will ultimately lead to better big bank earnings, as it will “drive higher advisory income as well as ancillary business such as debt/lending equity issuance, potentially higher secondary trading (in both EQ and FICC) and potentially stronger gains within merchant banking/private equity (which are driven by higher EQ levels, M&A and IPOs).”
The analysts also point out that over the last year, advisory services have represented 7% of total revenue at Goldman Sachs Group Inc (NYSE:GS), 4% of total revenue at Morgan Stanley (NYSE:MS), and around 1% each at Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM). However, when you factor in additional ancillary business (such as debt/lending equity issuance and potentially higher secondary trading), the overall related revenue for these banks is likely to be 2-4 times the mentioned percentages.
O’Connor and the DB team currently rate both Goldman Sachs and Morgan Stanley as a Buy.