new York JP Morgan’s dealmakers are the big stars right now. They had the strongest quarter ever thanks to a boom in mergers and acquisitions (M&A). Revenue from advisory services on mergers and acquisitions tripled year over year to $ 1.2 billion.
That helped America’s largest bank to a surprising quarterly profit of $ 11.7 billion – almost a quarter more than a year earlier. The higher profit is also the result of declining risk provisioning. The bank was able to release $ 2.1 billion in provisions for possible loan defaults with private and business customers.
In 2020, at the height of the corona pandemic, the institute, like all other major banks, massively increased its risk provisions for bad loans. CEO Jamie Dimon spoke of “good growth – despite the dampening effects of the Delta variant and the bottlenecks in the supply chains”. The strong M&A business also offset weaknesses in securities trading.
A new phase has begun for JP Morgan as well as for other Wall Street houses. The good mood in bond trading, which produced strong results in the pandemic, has flattened out. At the same time, the institutes have to pay significantly higher salaries in order to keep up with the fight and the talents. That drives up the cost.
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In addition, analysts expect slightly weaker revenues across the industry. At industry leader JP Morgan they were still slightly above the previous year’s level of 29.7 billion dollars, but below the expectations of analysts. Wells Fargo, Citigroup, Bank of America and Morgan Stanley announced their third quarter results on Thursday. Goldman Sachs will follow on Friday.
According to industry experts, the boom in mergers and acquisitions could continue for a while. Deals valued at $ 3.8 trillion were concluded worldwide this year, according to data from financial services provider Bloomberg. This could soon break the 2007 record of $ 4.1 trillion.
Berthold Fuerst, global head of mergers and acquisitions at Deutsche Bank, expects the boom to continue for years. The business is mainly driven by tech takeovers. The pandemic has made it clear to companies from a whole range of industries how important it is to leverage new technologies and digital offerings.
The urge to upgrade is correspondingly great. According to analysts, that will also boost results for Goldman Sachs and Morgan Stanley, which traditionally have strong investment banking businesses.
For universal banks, however, the focus is shifting to the other areas in which growth will be generated in the future. Thanks to lavish aid programs from the US government and the Federal Reserve, consumers and entrepreneurs are generally in good shape.
According to CFO Jeremy Barnum, loan default rates at JP Morgan are as low as they have been in a long time. However, this also meant that the lending business, a central business area for the banks, was rather sluggish.
Companies had stocked up on the capital market right at the beginning of the pandemic. Multiple consumer checks from Washington and rising stock markets have also provided many consumers with sufficient funds to pay off debts.
At JP Morgan, consumer and corporate lending was two percent below the prior-year level. However, according to Barnum, there are early signs that the mood may turn. However, it will take a while to reach pre-crisis levels, he admitted. Americans are again paying significantly more with credit and debit cards. The demand for car loans has also increased significantly.
Richard Ramsden, an analyst at Goldman Sachs, had recently made a similar statement. He assumes a trend reversal. “The outlook is increasingly encouraging,” he stated in an analysis. However, the increasing numbers of Covid infections, driven by the highly contagious Delta variant, have dampened consumer moods somewhat.
Fighting for talent drives costs
Therefore, that alone may not be enough to compensate for the rising costs, warn analysts. At JP Morgan, they rose 1 percent in the third quarter. The battle for talent has recently heated up significantly on Wall Street.
That puts banks in a difficult position. On the one hand, they have to cut costs. At the same time, they have to pay their top talent, especially in investment banking, more to keep them. Gerard Cassidy, banking analyst at RBC Capital, expects a series of austerity programs if the earnings situation does not improve soon. “In 2021 it will be difficult for banks to keep their operating costs in check. But those who show they can manage their costs well in this environment will be rewarded with better stock valuations, ”he believes.
Virtually all banks have increased their basic salaries for young bankers. Goldman Sachs pays $ 110,000 in the first year, $ 25,000 more than before. The institutes are increasingly facing competition from fintechs and hedge funds, which attract talent with better working conditions.
In the spring, a group of Goldman bankers caused an outcry with a presentation. They denounced the high workload of a good 100 hours per week. Since then, burnout problems have been discussed more openly not only in the financial world, but also among law firms and consultants. So far, however, there are no signs that anything will fundamentally change in terms of the high requirements.
US stock market expert Koch: “Are good quarterly figures enough to breathe new life into the stock market?”
Bank stocks are among the best performers this year, even if the uptrend has recently weakened. The KBW banking index has increased by around 35 percent since January. In the third quarter, prices moved mainly sideways. JP Morgan’s paper has risen by around 28 percent since the beginning of the year and was a good two percent in the red in early New York trading in a weak market on Wednesday.
Dimon, the longest-serving CEO of a Wall Street bank, was optimistic about the economic situation on Tuesday. In view of the problems with global supply chains, rising inflation and the ongoing pandemic, Goldman Sachs economists recently revised their growth expectations for the US economy down slightly.
Dimon doesn’t think the problems will last. “Chances are that in a year we will stop talking about supply chains and that Covid will have gone from a pandemic to an endemic,” said Dimon. Covid could thus become an infectious disease that occurs regularly, but no longer causes major damage to the economy.
However, he does not assume that inflation will weaken in the coming months, and thus contradicts the view of Federal Reserve Chairman Jerome Powell, who for a long time assumed that the price increases were only temporary.
Data released on Wednesday show that consumer prices in the world’s largest economy rose 5.4 percent year-on-year, more than expected. This also puts new pressure on the US Federal Reserve to move away from its ultra-loose monetary policy.
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