We're just seeing insane volumes come through these banks right now.

JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citi.

What do you think their combined trading revenues were? JPMorgan, a bit more balanced in terms of M&A, in terms of corporate banking.

Their trading revenues for equities were up 30% year on year.

When we talk wealth channel, we're not necessarily talking about money managers and mutual funds. There's a lot more interesting stuff that these banks do as well.

Has anything exciting been happening this quarter in wealth management? Hello to all our listeners, and welcome to this week's episode of "What's the Big Deal?" where we take a look under the hood of major deals in the public and private markets and explore finance industry developments. My name is Deborah Taylor, and I'm going to use my experience from my career in investment banking to bring insights from a public markets perspective.

And I'm Graham Smith, and I'll use my decade of private credit investing experience to bring the private market perspective here.

So Debs, what's new with you this week? What's been going on? Yeah, it's a great question. I've been really busy this week. I've been teaching.

I've been teaching at spring week programs at lots of investment banks and asset management firms.

So that's been really interesting, really fun to meet the next generation of analysts. How about you, Graham? I've been busy. I'm traveling. As you know, we travel a lot, and we're on the road teaching. I'm actually in Abu Dhabi right now.

Before I left, I think everyone was having a big freak out just saying, "Are you crazy for going there right now?" And actually it's been great so far. So I'm here for five weeks.

I'm training at one of the big sovereign wealth funds here.

It's a great group, great office. So, so far it's been a lot of fun.

And it's kind of... Honestly, Abu Dhabi feels a little bit like LA in terms of lifestyle, where I'm from, so it's kind of an easy transition.

Gosh, that's amazing. Really interesting that you're over there.

Yeah, so you feel safe? I do, I do. Although, I think this episode will come out in a few days after we record. Everyone in the office today was talking about the fact that the ceasefire technically expires, I want to say, tomorrow night. So we'll see what happens.

We'll probably know what happens by the time this actually goes up.

But talking to everyone from last time, it was kind of an annoyance rather than anyone feeling really, really worried.

Hmm.

But right now it does very much feel like business as usual.

Everyone's in the office. Everyone's out and about.

Honestly, until today, I hadn't even thought about anything since I've been here, so just keep my fingers crossed that that setup stays through the next month anyway, while I'm still out here.

But so far it's been a lot of fun.

Gosh. And actually what you're talking about, what's going on in the world is obviously having massive effects on the public markets, well, on markets in general.

So maybe a little bit of relevance to our discussion today.

Yeah. I'm sure we're going to talk about bank earnings today, and we'll talk about what the big deal is in a second.

Hmm. But volatility's going to play into that a little bit.

So yeah, living and breathing that every day or real time right now anyway. So big deal this week is all the investment banks posted their Q1 results, and it's probably not going to be a surprise to anyone given what we talked about, I guess, a few episodes ago, talking about record-breaking M&A.

We've been talking about some of the big IPOs coming down the pipe this quarter and this year. So spoiler alert, it was a great quarter for investment banks.

So we're going to get in a little bit to the detail of some of the results, take an opportunity to talk about what investment banks actually do, especially for anyone who is looking to get in the recruiting cycle and wants to up their knowledge a bit more about what ECM is, DCM, capital markets, all that good stuff.

Oh, I think there's an acronym alert there as well.

So we'll have to make sure we deal with those acronyms.

But yeah, definitely this is going to be a little deep dive into bank earnings for Q1, which was one of the best quarters ever for investment banks.

In terms of what we'll cover, first of all we'll do a little bit of unpacking of the Q1 earnings, what was strong, what surprised, and how this links to the macro backdrop, because there's been so much happening in the world in Q1. Secondly, we're going to use those results as a lens to explore the different parts of the investment bank and how investment banks make money. Finally, we'll answer the key question: Is this a return to sustained growth for investment banks or is this just a short-lived spike? Now, it's very topical that we're doing this.

As I mentioned just at the beginning, I've been attending spring week training where we do quite a lot of technical training for people just at university who are exploring potential careers in investment banking, and we spend a bit of time explaining the different moving parts of an investment bank. So if you have been attending a spring week training session, then this is definitely the episode for you where we'll take a bit of a deeper dive and also, as I say, look at the numbers as well.

So let's kick off, Graham. Let's talk a bit about Q1.

I'll start with a bit of an overview, and then it would be great to hear your thoughts on that as well. I think the main headline is that Q1 was quite extraordinary in terms of the numbers. I think the main investment banks, the three main ones, JPMorgan, Morgan Stanley, and Goldman Sachs, together they had combined revenues of just under $90 billion, and that's just for one quarter.

For a quarter. So that's really impressive. Yeah, I know.

Yeah, it's insane, right? And that's 12% up on last year, so it is significant improvements on last year.

But I think really what makes this a standout quarter is that this wasn't just outperformance on one part of the investment banks.

It was actually across all the divisions.

The three main engines, if you like, for generating revenue.

We've got investment banking feesTrading revenues and also wealth fees as well, so the wealth management fees.

So across all the areas of the investment bank, or the main areas, they did really well. And that's quite unusual, because what tends to happen is you'll get outperformance in one area, and then underperformance in another area, depending on the market conditions, and they yin and yang against each other. Whereas this time we had results where we had really strong performance in all the main areas.

So we definitely need to take a bit of a dive into why that is.

So a few data points for you. Trading performance, really exceptional, 20% up year on year if you look at the three main investment banks. We've got recovery in M&A and also cap issuance. The fees from that were 40% up year on year. And then we've got really robust growth in wealth management from huge asset inflows, and their revenues were up 10% year on year.

So let's start off with the biggest improvement, which was in terms of recovery in M&A and cap issuance, which was 40% up on their fees from last year.

So Graeme, the analyst in me wants to know, first of all, what's driving that, but also whenever we see really amazing revenue growth, the question I always ask myself is, well, hang on, is this flattered by really soft numbers from the previous year? Are we starting from a really low base or what we used to refer to as weak comps? Or is this genuinely- Right ... really amazing performance? I'll say, it seems like it's a bit of both, right? I think a year ago in terms of M&A volume, M&A deal fees, we were at a particularly low point.

Obviously, we're at a really high point right now.

So I think it's both starting from a slightly lower base, but also just volume last quarter was just incredibly strong. So we talked about some of the big deals that are really driving that mega deal pipeline. Again, I think it's still this tale of two halves a little bit.

You've got the big banks working on the mega deals that are just doing insanely well, and those mega deals are driving advisory fees. They're driving equity capital markets fees when you're underwriting equity issuances. Obviously, we've got some big IPOs coming down the pipe as well. So I'm expecting we'll see some of that continuing in Q2, Q3, whenever SpaceX, Anthropic, OpenAI actually get to market and list. So it looks like we're both at a really strong point right now. And I can see there being some tailwinds still in terms of, I don't think we're through this backlog of M&A that we had talked about a few weeks ago. I think what had happened is everyone had really pushed the pause button on M&A and deal doing, and that really helped dampen that starting position, low base we're starting from. And everyone's just said, "Hey, we can't wait on the sidelines forever. Obviously, we're in turbulent markets right now.

There's a lot of uncertainty, but ultimately, we just need to get deals done, and we're going to take a view on some of the things that are making deals a little bit easier right now in terms of a perceived easier regulatory framework, at least in the US, and just say, 'Hey, let's push through and get as much of this done as we possibly can.'" So I think we're just seeing insane volumes come through these banks right now.

And to your point, it seems like it's coming from all directions right now, which is not often the case.

Hmm. And you mentioned, actually, it sounds like from what you're saying about the pipeline, that this is actually just the start of what could be a record-breaking year in terms of deal fees.

But there's plenty more to come.

Quite possibly.

It's not just all one year done in Q1.

Yeah, quite possibly. Just based on the stuff that we know about.

Obviously, I don't think many of us know too much about the upcoming M&A pipeline because that's private until it's not, right? Hmm. We know what the publicly announced stuff is right now.

What happens the rest of the year, who knows? We do have these big IPOs that are coming.

That's going to be great for equity underwriting fees across the banks.

Just given the size of so many of these deals, it's not like it's going to be one book runner for any single one of these IPOs. So I can see this being just a really great year to be a banker, especially if you're a banker at one of the big bulge bracket firms.

We'll see how the year pans out in terms of the mid-market and smaller sized deals as well.

As I said, we've really been seeing the mega deals, what's driving volume right now in Q1. I don't think I have a view yet in terms of how that plays out the rest of the year. I don't know if you do either yet.

I think it's kind of tough to tell yet.

But certainly if you're at Goldman, JP Morgan, Morgan Stanley, you're probably feeling pretty good about life right now.

Yeah. It's interesting when you asked about if I have a view.

I think I'm genuinely surprised by how strong deal flow has been, just because when the markets are so jittery, and we've had very jittery markets for a whole host of reasons, it's unusual to have this really strong performance in deals.

And as you mentioned, it's really just a reflection of the pent-up demand rather than this being the natural sweet spot for the timing of when deals- Yeah ... usually take place. I think also, so you mentioned a few acronyms, ECM, DCM. I know there's also other parts of investment banking which have unusual names like LSFIN.

Can you just elaborate on what the different parts of investment bank do and how they contribute to the fees? Yeah. So I think the easiest one to understand, I think, for most people is probably M&A, where-- Well, maybe it is, maybe it isn't, I don't know, where you're really providing advice to people.

You're providing some valuation advice.

You're providing services to actually get the deal done. You're facilitating the transaction, brokering a deal, facilitating between buyer and seller, and you are getting paid, in essence, a success fee for getting that deal done. It's not all a success fee, but that's the majority of the fee pot. That's why when you see so much deal activity, you see these record-breaking M&A fees.

Then you have the parts of the bank that help these companies not just merge with one another, but access the capital markets and raise capital. So ECM or equity capital markets, this will be the side of the business that is working on, say, SpaceX, Anthropic, and OpenAI's IPOs, underwriting the equity, running the books, and actually bringing these public companies to market or private companies to the public market for the first time. So DCM or debt capital markets, you're generally helping investment-grade companies raise debt finance.

So think bonds, like investment-grade bonds as a particular point there. Contrast that with leveraged finance or lev fin, which is really what I used to do, where you're still in the debt capital markets, but instead of the traditional investment-grade bonds, you are more in the high-yield space.

So, think traditionally called junk bonds.

I just still kind of hate that name, but higher yields, higher leverage, higher risk, that's what the lev fin business in these banks tends to do. So those businesses all fit together to really facilitate these kind of record-breaking fees we're seeing.

And is it fair to say then that the ECM and DCM teams, they're much more focused on the public markets, lev fin, it's much more exposed to what's happening in the private markets.

And if that's right, then how does that kind of play into what we've been seeing on the deal flow side? I would say that's generally true, although it's not like-- Let's take the lev fin team at an investment bank.

It's not like all these loans are completely private. A lot of what these teams will be doing is, of course, underwriting loans and then distributing a lot of these particularly big deals on the lev fin side still have at least liquid or semi-liquid loans that get traded around the market. So I think this is probably a deal that was in the books last year, but the big EA underwrite, I think, was maybe the biggest lev fin deal basically ever. I think a lot of that debt as an example will be somewhat liquid.

So really on the credit side, we're really talking about the type of borrower necessarily rather than whether something is public or private.

And then, of course, you have the investment bank kind of lev fin teams, and then you have more mid-market private credit, which is what I used to do. So you've got all kinds of stuff outside the core investment banks, but investment banks are generally focused on those kind of big underwrite deals.

Just looking across the major investment banks, that's JP Morgan, Morgan Stanley, Goldman Sachs, I think they all had pretty good quarter in terms of their fees, but any big takeaways that you want to highlight there? Yeah, let's see. Let me just look at my notes here.

So if you want kind of the pure play example that M&A is really back, look at Goldman. They're always kind of top of the league tables. Their advisory fees this quarter were up 89% year on year. That's just insanity. They were up across the board.

They took a little bit of a hard time for missing some estimates on their fixed income side, but that was still up right.

It's just up everywhere.

So they're really focused on M&A.

JP Morgan, a bit more balanced in terms of M&A, in terms of corporate banking, in terms of lending.

Obviously, we also know JP Morgan from the consumer banking business.

It's big, it's diversified. We'll talk a little bit around how a lot of these banks are looking to diversify and smooth out some of these earnings because the flip side to investment banking fees being back and up in a big way right now is there's no guarantee that's going to be the case in another year.

So, something we'll talk about in a few minutes.

Morgan Stanley also up. Morgan Stanley has done an incredible job as well on the wealth channel, and again, something I think that a lot of these banks are looking to add more of just because it provides a bit more of a stable revenue stream, unlike these advisory fees that are really just dependent on M&A volume.

Okay, Graham, I've got a challenge for you.

Trading revenues across the biggest five investment banks, that's JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citi.

What do you think their- Okay ... combined trading revenues were? Wait, okay, what was our stat from the very beginning of the open with where in Q1, was it combined revenue for, was the top three investment banks in total across everything.

The top three across all their revenue streams was just under $90 billion.

Just under. Okay. All right. So let's take half that. Take, I don't know, 45, 50 billion.

Yeah. Pretty good, actually, Graham. Yeah, it was just under $50 billion.

Okay. All right.

But that is impressive. And that was a big surprise across the streets. And in fact, probably the biggest surprise in the results have just been reported by the investment banks.

And I think part of that is although we know that things like market volatility, which we have definitely had in Q1, they do contribute to good trading revenues.

ButIt's very hard to predict trading revenues. They're notoriously difficult- Yeah ... to build real expectations around.

So I think the market knew they would be good, but not quite how good they were going to be. So it was a big surprise, and I think there are three key drivers of the volatility that we're seeing in the markets. We know that there has been AI disruption fears. We've had the AI scare trade, and that's been a really big impact, particularly on the equity markets.

We've had, obviously, geopolitical tensions causing widespread concern around what's going to happen.

But also that then bleeds into concerns around the rates environment. So if you have concerns around inflation because of oil prices, then that then leads to concerns that interest rates are going to go up to counteract that inflation risk. So all of that combined has created so much volatility in the markets. And if you're managing money and you have a portfolio that reflects certain expectations, well, all of those events could really cause you to change your view, and that means you have to change your positions. That means you've got to trade.

Who benefits from that? Well, it's the investment banks because they're basically the market makers. They're the ones that facilitate that trading activity. So it's led to just the most amazing set of trading revenues across the street.

But I think what's really interesting is actually you see different banks benefiting in different ways from- Mm ... the market conditions. Let me explain what I mean.

If we start off with JP Morgan, they dominate in terms of their fixed income trading.

Their revenues for fixed income trading were up 20% year on year.

And as I mentioned, that's a huge amount is due to their interest rate uncertainty. If you're expecting a certain rates environment and that completely pivots during the quarter, then so much trading activity happens off the back of it.

So for JP Morgan, the story was about fixed income trading, whereas for Goldman Sachs, less so. In fact, they didn't do so well on the fixed income trading side, but actually, they did really well on the equities trading side.

It was a standout performer for them.

Their trading revenues for equities were up 30% year on year.

Now, Goldman Sachs is really well aligned with hedge funds. They are one of the leading prime brokers.

And there's been a huge amount of hedge fund activity.

Hedge funds go a bit crazy when it's volatile markets.

They're quick movers and do lots of trading then.

So they've really benefited at Goldman Sachs from that side of things.

And then Morgan Stanley, again, they've also done very well, but again, on the equities side. It was their equities trading that was very strong, but for very different reasons for Goldman Sachs.

And as you mentioned earlier, Morgan Stanley have a very strong presence in wealth management, also institutional trading as well.

So as you can see, although all three main banks have done very well on the trading side, it's really for quite different reasons.

I think the other thing I would just highlight, and maybe a bit surprising if you're new to analyzing banks, is the fact that it is volatility in the markets that really enhances trading revenues. You might assume that it's when the markets are booming, that that's when lots of trades happen. It's not.

It's when there's actually lots of uncertainty that people are having to change their positions and therefore conduct lots of trades.

Because we're not really, I guess, in the same world we were in pre-2008 where these banks had huge prop desks and were taking massive positions with their own balance sheet.

Right. On the trading side, we're really talking about facilitating trades, making markets, acting as prime brokerage for hedge funds, that kind of thing, rather than they're making giant profits because they've taken a huge risk position and just made a crazy return when markets have gone up.

For sure. The regulation's completely changed after the global financial crisis. They aren't trading with their own money for making their own profit.

When they're market making, it's usually this thing that we refer to as matched principal trading, where they do take the risk themselves.

They buy shares or buy bonds to then sell on to a counterparty. So they're taking that risk, but it's a brief risk.

They're not going to sit on that- Right ... on their own book, on their own balance sheet for an extended period of time.

So yeah, it's all about volatility in the markets that's creating this boom in their trading revenues. And whether that will persist, well, that's really the big question that none of us can answer.

It depends on what's going to happen with geopolitics.

It seems very much like the AI trade is still playing out.

We'll see where that's going to go.

So, yeah, who knows where things will go, but definitely it sets up the banks for a very strong year in terms of their trading revenues.

Yeah. I was going to say, then I guess that kind of leads us onto the last pillar. If we have general investment banking and trading, now we'll talk about wealth management, which I feel like is kind of the...

I don't know. We never used to talk about that very much in the context of investment banks. Certainly when I was starting out, admittedly a long time ago now. I started in 2005. We're old, Debs.

What are you going to do? We are old.

When I was starting out, no one really talked about wealth management too much, certainly at these banks. Most of the banks had some kind of wealth management division, but it was never much of a focus.

I feel like that's changing quite a bit these days.

Morgan Stanley's a really good example of that, and he's probably always been the front runner in the wealth management space.

I was even thinking back to days at Ares when you were raising closed-end investment funds, but one of the vehicles that we raised money through was a Morgan Stanley feeder.

So really when we talk wealth channel, we're not necessarily talking about... money managers and mutual funds. There's a lot more interesting stuff that these banks do as well, and really works with the other sides of their business, right? Kind of introducing wealthy individuals into other deals the banks are working on, private capital transactions. It's not just the kind of vanilla stuff that a lot of people tend to think about.

And I think the reason that the banks are so interested in this kind of revenue is it tends to be a lot more stable, right? You've got an individual who parks, I don't know, a few million bucks at one of these banks. They get their management fees.

They're getting fees every time these individuals trade as well. And it helps to round out what can be some more volatile income streams from things like M&A, where this really depends on M&A volume. And I think you have a corresponding feature in the asset management world as well, where you've got management fees, where you look at when you value an asset manager, you place a much higher multiple on that fee income because it's a lot more stable and recurring than you do on the performance fees, the carried interest, because you just don't know where that's going to go.

I think the wealth management channel for banks is kind of the same.

It might not be as big or as sexy, but in terms of the quality of the income stream, they're pretty high because it's pretty reliable.

So I think we're seeing that as a much bigger focus for a lot of these banks, certainly these days compared to 20 years ago.

So Graeme, you're really selling it to me here, and I know it hasn't really been grabbing any headlines, wealth management. You're making it sound really boring.

You said it's not even sexy. So, you've mentioned the high quality of revenue streams. Is that all that is attracting the investment banks there? Is it the fact that it is kind of this slow and steady, think of the hare and the tortoise, it just keeps plodding along, generating revenues? Or is there something exciting? Has anything exciting been happening this quarter in wealth management? Well, I think there's more than just the kind of stable management fees. I do feel like they're genuinely inventing new products in the wealth channel and really bringing wealth investors more into, say, the markets I used to be in, where you would historically only ever raise institutional money. So you go to pension managers, sovereign wealth managers.

You'd never even think about accessing the wealth channel.

And you've got to have different structures and different vehicles to cater for the demands and interests of people in this channel, and I think some of these banks are doing this pretty successfully.

Again, I think Morgan Stanley is kind of the standout example of that.

So I'd expect to see more of that from the banks over the coming quarters and years for sure.

Yeah. And I did read that there have been some inflows into wealth management, and that's really kind of boosted their fees this quarter, hasn't it? Yeah, indeed. I don't know.

I would imagine in times of volatility, if you've got money to manage, who do you go to trust? One of these big investment banks.

Maybe they're going to charge a little bit more than someone smaller, but you're probably in fairly safe hands.

So, it might not be the sexiest side of the business, but it's definitely one for these banks to grow a little bit.

Yeah, interesting. So I guess we've talked through the main takeaways from the earnings. Anything you want to highlight around roles and career opportunities within these different parts? Ooh, let's see. Well, look, when things are good and there's money going around, then in theory, demand for analysts for new jobs is going to be higher than normal. So, let's hope if you're in the position where you're looking for a job coming out of school, that going into recruiting now is, in theory, a pretty decent time. I don't have a view into the actual recruiting pipeline of any of these banks, but just on the basis that things are busy literally across the board, now is an interesting time to get involved.

And then, I don't know what you think, Debs, in terms of where you want to sit at each one of these banks, what kind of team you want to be in.

A lot of that just depends on your personality and what you find interesting.

Do you like the chase on the deal? Do you find that kind of environment interesting? Then M&A is for you. Are you way into the public equity markets, then ECM. Same thing with the credit markets for DCM.

I don't know about you, so much about finance, I think, is just what you're personally wired to gravitate to and to like.

And that's how I always think about what kind of jobs to go for.

For sure. When I'm talking to people at Springweeks, for example, I talk about how important it is that you understand the different roles and the different skills required.

Yeah.

And as you mentioned, the nature of the roles means that the actual work-life balance, the role that you play is going to be so different.

You might be thinking about going into investment banking in quotes, but actually, if you're working in the markets division, we often talk about that being quite buzzy, lots of news flow.

You need to be able to respond very quickly to new information.

Whereas if you're working in investment banking, it can be very high pressured, very deadline driven, but maybe more like working- Yeah ... in a library where it's very quiet and focused.

And thatI was on the public markets side.

I quite like a buzzy environment. You were on the private markets side.

Maybe you like a bit more of a library.

But it's quite important that you think about what- I wouldn't call it a library, but okay.

And also, your attitude to deadlines. I'm not great with those.

You're probably better at them than I am. But it's just things like that.

I still work well under pressure, though. I'm a procrastinator, yes.

But that's just been me forever, so as long as it gets done. Are you an essay crisis person? Oh, yeah. 100%.

One thing I will say is if you're coming into this field now, I feel like most of you have it better than we did.

I feel like everyone probably says this at some point, but everyone I know, just talking to analysts, associates I've trained with, investment banks, or people who have moved on from investment banking into private equity, private credit, whatever else, has generally said that things have gotten a little bit better in terms of work-life balance.

Mm.

So, I do feel like all those initiatives that banks have undertaken to make life slightly better for people seem to have done something anyway. Not going to say you'll be leaving your desk at 5:00 or 6:00 every day, but maybe not till 2:00 in the morning, literally seven days a week.

Literally the first year I started working at Lehman Brothers, and I guess we can talk all the crap about Lehman we want because they're gone, right? I don't think I had a single day off my entire first year. Literally no weekend days. I didn't take a single vacation.

It was pretty bleak. Actually, moving to London was way better because you got on the European vacation schedule and got actual five weeks of vacation. And yeah, you work like crazy when you're in the office, but people were still okay with you taking a break every once in a while.

That was not the case at Lehman in the US anyway. So, I don't miss those days.

I definitely think there's a difference between markets and investment banking, because markets side, you're so tied to the markets.

Sometimes you have to stay late to finish a research note, but you just don't have those deadlines.

Yeah.

The flip side is never get too attached to a holiday that you've planned because you could be- Right ... planning to go away, and then suddenly there's some news flow, and then that just blows your vacation plans out the water.

So they kind of are trade-offs. And definitely there's geographical differences. I know vacation allowances, different in Europe versus the US.

So there are differences there. But I think the number one thing that I always try and highlight to junior analysts or to spring week students is the importance of just feeling passionate about finding out more about companies.

Yeah.

We've done a lot of company analysis alongside our deal dissection, and I think that reflects the fact that both of us are quite interested in what companies do, what their business models are, and how that drives the numbers.

And that's so important because there will be times when you're working till 2:00 a.m., and you don't mind that so much if you're actually interested in what you're doing. I can only imagine it's quite painful if you're doing it, and you just find it utterly boring. So that sense of- 100% ... finding it interesting is so, so important.

Yeah, no. But telling who's out recruiting right now, well, good luck, and hopefully all this activity just means it's a good time to be looking for a job in this world right now.

So I think that's it for today's episode of "What's the Big Deal?" And if you enjoyed our dive into Q1 bank earnings and our exploration of roles in investment banking, please do like and leave us a rating. And if you're watching us on YouTube, please do like and subscribe, and leave us a comment.

So until next week, same time, a new deal, and some fresh insights from myself and Graham.