new York The investment bankers are once again the stars of Wall Street. In particular, the boom in mergers and acquisitions (M&A) has supported the quarterly profits of the big banks JP Morgan Chase and Citigroup, which presented their figures on Friday. For JP Morgan, America’s largest financial institution, 2021 was its most profitable year ever, with profits totaling $48.3 billion — nearly two-thirds more than in pandemic-year 2020. However, the quarterly profit fell 14 percent back.
This development is also due to distortions caused by the reduction in risk provisions. JP Morgan, like all other big banks, had set aside billions early in the pandemic to be prepared for non-performing loans. However, since the situation eased faster than expected, the banks have been in the process of reducing their cushions for several quarters. In the fourth quarter, JP Morgan liquidated an additional $1.8 billion. However, the results fell short of analysts’ expectations. The stock lost more than 4 percent in early New York trading.
CEO Jamie Dimon was confident. “The economy continues to fare fairly well, despite resistance over the Omicron variant, rising inflation and supply chain bottlenecks,” he said. Consumers would benefit from the good situation on the labor market and higher wages.
However, looking at the numbers, a more differentiated picture emerges. Trading sales fell by a total of eleven percent – more than analysts had expected. Bond trading in particular was weaker after JP Morgan was able to show a particularly strong prior-year quarter. It’s also a bad omen for Deutsche Bank, which will report its fourth-quarter and full-year 2021 results on Jan. 27.
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Above all, trading in bonds, foreign exchange and derivatives is one of the traditional strengths of the largest German money house. Analysts predict revenues of 1.3 billion euros in this area for the fourth quarter after 1.4 billion in the previous year. For the entire investment bank, the experts expect average revenue of 1.8 billion euros for the fourth quarter. In the same period last year it was 1.9 billion.
Beginning of a new phase
A new phase has begun for Wall Street houses. According to analyst estimates, the trading business will continue to normalize, but it could level off above the pre-crisis level. The M&A business could also remain strong this year. In addition, the institutes will benefit from the interest rate hikes planned by the US Federal Reserve. Three to four rate hikes of 0.25 percentage points each are expected.
Analysts expect this to drive net interest income across the industry. This is the difference between the interest that banks pay on deposits and the interest on loans. However, JP Morgan warned on Friday that the bank expects interest income to be around $50 billion this year, down from 2019 levels.
The sharp rise in inflation and the struggle for talent are also reflected in the costs. Operating expenses rose by 11 percent to $17.9 billion. The trend will continue this year, CFO Jeremy Barnum pointed out in an interview with journalists. “We are experiencing wage inflation and need to remain competitive on pay to retain and attract the best talent.”
The lending business fell slightly by one percent, but is in the process of normalizing, said Barnum. Companies would draw more credit lines. Both businesses and consumers have been buoyed by trillion-dollar bailouts during the pandemic, dampening demand for credit. The bank expects the corporate lending business to normalize first, with consumers to follow in the second half of the year.
Profit slump at Citigroup
In the Citigroup profit has plummeted: strong growth in investment banking ensured that the bank still earned more in the fourth quarter than analysts had given it credit for. The financial group achieved a profit of 3.2 billion dollars – a decrease of 26 percent within the year.
Citigroup nevertheless increased earnings by one percent to $17.0 billion. The cost rose 18 percent to $ 13.5 billion. CEO Jane Fraser is in the middle of a massive renovation of the financial house. On Friday night, she announced that she would say goodbye to the private customer business in Indonesia, Malaysia, Thailand and Vietnam and sell it to Singapore-based rival United Overseas Bank for $ 3.7 billion.
In the middle of the week she had already announced that she would part with the private customer business and other parts in Mexico. Fraser is thus in the process of shrinking the institute, which has invested in international expansion for a long time, and focusing on US business.
Citigroup has also recently struggled with higher costs related to fixing weaknesses that supervisors had identified in the institution’s control systems. For the full year 2021, despite the weaker final quarter, Citigroup posted a 99 percent increase in profit to almost $22 billion, again primarily due to the release of risk provisions. Overall, revenue fell 5 percent to $71.9 billion. The stock was down about 2 percent in early New York trading.
Wells Fargo expands surplus
At the competitor Wells Fargo on the other hand, the profit in the final quarter was 86 percent higher. The fourth largest financial group in the USA achieved a surplus of 5.8 billion dollars after 3.09 billion dollars a year ago. Earnings per share were $1.38 per share. Analysts had expected $1.13 per share. The stock rose 2.6 percent to a three-and-a-half-year high of $57.40.
Wells Fargo sold its asset management and corporate trust businesses last year. That boosted profits by $943 million in the quarter.
The world’s largest wealth manager, Blackrock, also opened its books on Friday. Assets under management reached a record $10.01 trillion as of December 31st. At the end of the previous year it was still 8.68 trillion. Adjusted earnings increased 2.5 percent to $1.61 billion.
With agency material
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