Initial public offerings are netting solid profits for the two large U.S. investment banks. Both Morgan Stanley (MS) and Goldman Sachs (GS) posted strong equity underwriting revenues as they try to court ride-hailing company Uber on a huge potential IPO that could reach a market value of $120 billion.
Both companies, known for their fierce competition in underwriting IPOs, reported estimate-beating earnings for the third quarter on Tuesday.
At Goldman Sachs, revenues from equity underwriting more than doubled — from $212 million in the third quarter of 2017 to $432 million in the third quarter of this year. Morgan Stanley similarly grew equity underwriting revenues from $273 million in the third quarter of 2017 to $441 million in the third quarter of this year.
The earnings beat was also boosted by stronger results from their equity trading desks.
Morgan Stanley CFO Jonathan Pruzan said the company’s backlog of equity and debt to underwrite is “healthy.” Pruzan said he has not seen any economic indications that the activity should slow, but cautioned that a late cycle economy is continuing to evolve.
“If we get into a period of prolonged volatility, that might close,” Pruzan said.
A number of high-profile IPOs could join the backlogs soon; both Goldman Sachs and Morgan Stanley are listed as lead underwriters for Chinese tech giant Tencent Holdings. Goldman Sachs also recently landed an agreement with SoftBank Group Corp. to publicly offer its Japanese wireless business.
Both companies also passed up on Lyft’s IPO to pursue Uber. Lyft just picked JPMorgan Chase (JPM) and Credit Suisse Group AG as its underwriters, according to The Wall Street Journal. The same publication reported that both Goldman Sachs and Morgan Stanley delivered valuation proposals to Uber last month.
Devin Ryan, senior research analyst at JMP Securities, said the gigantic IPOs could have a structural effect on the pipeline for equity underwriting. Ryan said the availability of private capital, especially to tech companies, is allowing companies to grow for much longer before a public offering becomes attractive.
“That would be another potential lag in I-banking revenue,” Ryan said.
M&A sees some seasonal slowing
The surge in revenues from its capital markets businesses was slightly offset by slower activity in their advisory businesses, where they make money by helping companies broker mergers and acquisitions.
Morgan Stanley noted “lower levels of completed M&A activity” and said its advisory revenues fell from $555 million in the third quarter a year ago to $510 million in the third quarter of 2018. Goldman Sachs, which Dealogic says is the top M&A advisor globally, saw flat growth in its advisory revenues. The company reported net revenues of $916 million in the third quarter of 2018, “essentially unchanged” from the same quarter a year ago.
Ryan cautioned that the third quarter, which covers the summer months, tends to be a quiet period for M&A.
“Advisory fees, equity underwriting tend to be pretty lumpy and tend to be idiosyncratic,” Ryan said, adding that the long trend line for M&A appears to be “a little bit above normal.”
Brian Cheung is a reporter for Yahoo Finance.