Morgan Stanley, Goldman Sachs, Bank of America (BofA) and Citigroup all surpassed analysts’ estimates for their third-quarter earnings, helped by renewed strength in their investment banks.

The Wall Street giants have benefited from a pickup in dealmaking activity that bankers are hoping is the beginning of a sustained rebound following a torrid 2023.

Top US lenders are leaning more on their investment banking arms to bolster profitability as they grapple with falling interest rates.

Banks’ net interest income (NII) – the difference between what banks pay on deposits and earn from loans and other assets – boomed after the US Federal Reserve started hiking borrowing costs in early 2022.

But lenders’ margins have come under pressure this year as markets grew more confident that the Fed would lower rates, which it did in September with a jumbo 50 basis-point cut.

As rates come down, however, Wall Street is hoping that confidence for the deals and IPOs that investment banks advise on will pick up.

Morgan Stanley joins Wall Street windfall

On Wednesday, Morgan Stanley reported a 32 per cent rise in third-quarter profit compared to the same period last year, topping analysts’ expectations.

Its investment bank saw a $3.2bn (£2.5bn) profit, up from $2.4bn (£1.8bn) a year prior. The unit’s revenue jumped 56 per cent.

The bank’s institutional securities business, comprising investment banking and trading, reported $6.8bn (£5.2bn) in revenue, compared with $5.7bn (£4.4bn) a year earlier.

Ted Pick, who became Morgan Stanley’s chief executive at the start of this year, has looked to shore up the investment bank and deal with regulatory scrutiny over its wealth management business.

In recent years, the bank has diversified its business model to focus more on wealth management and be less reliant on investment banking, which is often considered a volatile revenue stream.

Morgan Stanley’s wealth management revenue came in at $7.3bn (£5.6bn) in the third quarter, compared with $6.4bn (£4.9bn) a year ago.

The earnings came hot on the heels of Morgan Stanley’s Wall Street rivals also posting bumper growth in their investment banking arms.

Goldman gains steam

On Tuesday, Goldman’s results saw its net income surge 45 per cent to $3bn (£2.3bn), compared to $2.1bn (£1.6bn) in the third quarter of last year. Analysts had expected a figure of around $2.5bn (£1.9bn).

It was boosted by an 18 per cent jump in equity trading revenues, beating estimates that they would come in roughly flat year on year.

The bank’s overall trading revenue ticked up around two per cent despite CEO David Solomon warning last month that he expected the metric to drop by nearly 10 per cent thanks to weakness in fixed income trading – revenue for which fell 12 per cent.

The jump in profit can partly be attributed to losses Goldman took a year ago as it made writedowns on its consumer business and real estate investments.

Still, Goldman’s dealmaking fees narrowly beat estimates with a 20 per cent rise to $1.9bn (£1.5bn).

Like Morgan Stanley, Goldman is also looking to grow its presence in asset and wealth management. That division enjoyed a 16 per cent rise in revenue last quarter to roughly $3.8bn (£2.9bn).

Goldman’s share price was broadly flat at market close on Tuesday.

BofA bears rate-cut hit

BofA’s profit on Tuesday similarly beat estimates, although it achieved this by falling less than expected as the more diversified bank offered better rates to customers to stop them moving their deposits elsewhere.

The second-largest US bank’s net income fell to $6.9bn (£5.3bn), from $7.8bn (£6bn) a year earlier. Gains in trading revenue, asset management and investment banking fees offset a three per cent decline in NII.

BofA’s investment banking fees rose 18 per cent to $1.4bn (£1.1bn). Meanwhile, sales and trading revenue jumped 12 per cent to $4.9bn (£3.7bn), marking the 10th straight quarter of year-on-year growth.

The bank’s equities revenue jumped 18 per cent, helped by a stock market rally at the end of the third quarter ahead of the Fed’s rate cut.

Elsewhere, BofA’s wealth and investment management revenue rose eight per cent to $5.8bn (£4.4bn), with client balances jumping 18 per cent to $4.2 trillion (£3.2 trillion).

BofA’s shares closed 0.6 per cent higher on Tuesday.

Citi’s strategy in focus

Citi also posted a fall in net income on Tuesday, to $3.2bn (£2.4bn) from $3.5bn (£2.7bn), which beat estimates.

The bank’s dealmakers enjoyed increasingly lively capital markets as corporate clients issued more debt and equity, with investment banking revenue rising 31 per cent to $934m (£713m).

M&A fees jumped 32 per cent to $392m (£299m), a bigger jump than Citi’s rivals. Its debt capital markets fees surged 75 per cent to $476m (£363m).

The bank’s equities trading revenue gained 32 per cent to $1.2bn (£916m), which fuelled a one per cent uptick in Citi’s overall markets revenue. But bond trading disappointed with a six per cent revenue drop to $3.6bn (£2.7bn).

Over the past year, Citi’s Scottish CEO Jane Fraser has embarked on a sweeping restructuring designed to boost investor returns, simplify the bank’s sprawling operations and fix its longstanding regulatory issues.

In a sign the strategy could be bearing fruit, Citi’s share price is up 22 per cent so far this year.

However, investors were spooked by Citi’s boosting of loan loss reserves last quarter, sending its stock down 5.1 per cent at Tuesday’s close.

The three earnings statements mirror those of fellow Wall Street titans JPMorgan Chase and Wells Fargo last week, which also beat expectations and saw their dealmaking arms gain steam.

JPMorgan reported a 31 per cent increase in investment banking fees to $2.3bn (£1.8bn), while Wells Fargo saw a 37 per cent bump to $672m (£513m).

Morgan Stanley will round off the big banks’ reporting season on Thursday.