Finimize - ⚠️ Life-or-debt decisions

What’s going on here?

Morgan Stanley and Bank of America joined the expectation-beating bank brigade on Tuesday.

What does this mean?

After JPMorgan, Citi, and Wells Fargo set the stage with stellar results last week, Bank of America kept the momentum going. The firm cashed in on higher interest rates, raking in money from customers’ payments on loans. And the good news didn’t stop there: its investment banking business also outperformed, growing versus the same time last year and helping prop up results. The upshot of that: both revenue and profit outstripped expectations.

And that brings us to Morgan Stanley: the firm’s dealmaking and trading didn’t hit any high notes, but it did have wealth management to shore things up. The division, which manages the money of the deep-pocketed and well-heeled, posted record revenue last quarter, helping the firm beat expectations overall.

Why should I care?

The bigger picture: Wealth is wealth.

Morgan Stanley chose to lean into its wealth management business after the financial crisis struck, and for good reason. See, the sector’s a steady Eddie, less prone to market rollercoasters and churning out more consistent income than the high-stakes world of trading and dealmaking. Plus, wealth management’s a bit like Hotel California: customers check in, but they rarely leave. That helped it hit the jackpot last quarter – and the firm’s planning to lean in further, with the aim of doubling the segment’s profit in the coming years.

Zooming out: Goldman Sags.

This earnings season has been a win for big US banks so far, but there’s one big dog left to report: Goldman Sachs. And with down-in-the-dumps investment banking as its mainstay, analysts are already predicting one of Goldman’s worst quarters in years. Mind you, though, JPMorgan and Bank of America did manage to beat estimates for their investment banking businesses – so maybe there’s hope Goldman can pull an expectation-beating quarter out of the hat too.

What’s going on here?

Private equity (PE) firms are racking up debt to return cash to investors – but that could create problems of its own.

What does this mean?

PE firms typically use a cocktail of investor cash and debt to buy out their target companies, spruce them up, and sell them for a profit down the line. But lately, that final step has been more like a tightrope walk, with exit activity taking a nosedive due to rising debt costs and economic jitters. In fact, both global listings of portfolio companies and sales to corporate buyers are set to hit a ten-year low this year. So, PE firms are getting creative, finding other ways to return cash to investors instead. Case in point: the likes of Texas-based Vista Equity Partners and Sweden’s Nordic Capital have been borrowing against their portfolios to return cash to their investors.

Why should I care?

Zooming in: Out of their debt.

This strategy is adding another layer of debt to PE funds – a risky move when interest rates are high. It’s effectively like kicking the can down the road: after all, they still need to sell their holdings at some point, and with the economy so bumpy, there’s no guarantee that’ll get easier anytime soon. Plus, debt increases the firms’ financial risk, which might spook investors. Add it all together, and some firms might end up finding it hard to raise cash for new investments too, leaving them in a seriously tight spot.

The bigger picture: Deal or no deal.

PE firms are big players in the dealmaking world, so their struggles have contributed to its overall slump this year. But there’s a silver lining: experts think the stock market recovery could boost CEOs’ confidence when it comes to striking deals. And there are signs that’s already happening, with last quarter’s deal values outstripping the first quarter – suggesting dealmaking could already have bottomed out.