Given the reversal in corporate debt and equity issuances and deal-making activities, the Zacks Investment Bank industry is expected to witness a turnaround in investment banking fees in the quarters ahead.
Also, heightened client activity in the trading business is expected to continue as uncertainty-induced volatility is likely to persist in the near term. While costs related to technological upgrades might impede bottom-line growth, these will eventually lead to improved operating efficiency. These factors will keep aiding industry players like Interactive Brokers Group, Inc. IBKR, Raymond James Financial, Inc. RJF and Piper Sandler Companies PIPR.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).
3 Themes to Watch in the Investment Bank Industry
Underwriting and Advisory Business Rebounding: After a sustained weakness in underwriting, IPOs and deal-making activities since 2022 due to geopolitical tensions, global supply-chain disruptions, aggressive monetary policy tightening worldwide to control inflation and potential recession risks, green shoots in advisory and underwriting businesses are visible with the deal pipeline looking healthy.
As the macroeconomic environment steadies and the corporates adjust to the high-rate regime, global underwiring and M&A activities will gradually stabilize. Though the ride will be bumpy for investment banks in the near term, the improving operating backdrop will support industry’s players’ revenue growth.
Trading Business Offers Some Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. Though there has been some stability in the macroeconomic backdrop, markets continue to grapple with high global inflation, high interest rates and other geopolitical matters. So, trading volumes will likely remain decent, driven by solid client activities in equity and fixed-income businesses, thereby boosting industry players’ trading income.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising are likely to aid the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to help clients with infrastructure development and new platforms. While investment banks will likely face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #27, which places it in the top 11% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Before we present a few stocks that you may want to buy, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past three years. While stocks in the industry have collectively gained 3.8%, the S&P 500 composite has jumped 9.3% and the Zacks Finance sector has risen 16.3%.
Three-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 4.07X, above the median level of 3.24X, over the past five years. This compares with the highest level of 4.24X and the lowest level of 1.37X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.66X and the median level is 10.14X.
Price-to-Tangible Book Ratio (TTM)
Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.87X and the median level of 4.26X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Investment Banks Worth Betting on
Interactive Brokers: This Zacks Rank #2 (Buy) company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, apart from executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady top-line improvement. Also, innovative products and measures taken to enhance global presence are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses act as a deterrent, IBKR continues to explore opportunities in emerging markets. Further, given the rapid growth of its European business, the company has substantially expanded its operations there. These efforts help diversify its operations and gain revenue stability.
Shares of the company, which has a market cap of $44.9 billion, have rallied 14.4% over the past six months. The Zacks Consensus Estimate has moved almost 1% north to $6.07 for 2024 in the past 30 days.
Price and Consensus: IBKR
Raymond James: This is a diversified company based in St. Petersburg, FL. The company, along with its subsidiaries, provides financial services mainly in the United States, Canada and the U.K.
RJF, with a Zacks Rank #2, has inked several strategic deals over the past years, which has also helped its expansion into Europe and Canada. In fiscal 2023, the company acquired Canada-based Solus Trust Company Limited, while in fiscal 2022, it acquired SumRidge Partners, TriState Capital Holdings and the U.K.-based Charles Stanley Group PLC. These deals, along with several past ones, poise Raymond James well for future growth. Management looks forward to actively growing through acquisitions with an aim to strengthen the Private Client Group and Asset Management segments further.
Though steadily rising expenses make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, Raymond James’ robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $24.8 billion, Raymond James is expected to continue benefiting from its scale and business expansion initiatives. Its shares have rallied 14.9% over the past six months. The Zacks Consensus Estimate for fiscal 2024 earnings has remained unchanged at $9.20 over the past 30 days.
Price and Consensus: RJF
Piper Sandler: It operates as an investment bank and institutional securities firm. This Zacks Rank #1 company, based in Minneapolis, MN, offers investment banking and institutional sales, trading and research services. Also, PIPR provides advisory and underwriting services.
The company has been enhancing its scale and capabilities through strategic buyouts. These have not only diversified its revenue base but also expanded PIPR’s sector coverage, geographical footprint and market share.
Thus, through its scaled platform, Piper Sandler has been witnessing robust top-line growth. As the company continues to hire exceptional talent and broadens industry and product coverage, further top-line growth is anticipated despite near-term industry-wide headwinds.
PIPR has a market cap of $2.9 billion. Over the past six months, shares of the company have jumped 28.9%. The Zacks Consensus Estimate for 2024 earnings has been revised 9.1% upward to $11.17 over the past 30 days.
Price and Consensus: PIPR
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