Wall Street banks report record profits for 2021

Wall Street’s biggest banks will this month report record profits for 2021 on the back of bumper investment banking fees and lower-than-expected losses on pandemic loans. with analysts warning it could take years to repeat such monstrous earnings.

Citigroup and JPMorgan Chase were the first major banks to release Q4 results, reported on Jan. 14. Goldman Sachs on Jan. 18, then Morgan Stanley and Bank of America on Jan. January 19.

Among them, analysts expect all but Citi to report their highest-ever full-year profit, according to estimates compiled by Bloomberg and historical earnings data from S&P Capital. IQ.

“You might have to go as far as 2024 before earnings are higher than in 2021,” said Matt O’Connor, head of large-cap banking research at Deutsche Bank.

Line chart of Net Income in Billions showing Major US Banks to record profits in 2021

However, potential The Federal Reserve’s rate hike in 2022 is stoking optimism that banks are likely to have another strong year.

Jason Goldberg, an analyst at Barclays, wrote in a note to clients this week: “We expect bank stocks to continue outperforming the market into 2022.

Earnings in 2021 improved on the back of a release of reserves banks had set up to cover potential losses from loans they feared could turn sour due to the pandemic.

The loss has so far proven to be much less common than it is feared. Goldman analysts estimate the seven major banks it includes, including JPMorgan and Bank of America, have now issued $36 billion of the $50 billion they initially allocated in anticipation of losses. loan.

Banks also benefit from blockbuster investment banking fees, with global mergers and acquisitions due in 2021. to hit Their highest level since record.

Devin Ryan, an analyst at JMP Securities, said: “People don’t believe, especially for fee-based capital market businesses, that levels experienced in 2021 are normal.

Banks have so far used profits to invest in Technology, pay bonus and repurchase their own stocks.

After such a big year, investors are questioning whether 2021 will represent “peak earnings” for the big banks, according to Richard Ramsden, banking analyst at Goldman Sachs.

“What investors are trying to figure out is, is the market overvalued or undervalued?” Ramsden said.

Right now, the market is pricing in another good year for banks. US bank shares are up 35% in 2021, outperforming the S&P 500 index, and have rebounded sharply in the first few days of 2022, according to Deutsche Bank analysts.

Profit% line chart shows Bank Stock outperforming broader market in 2021

Investors are betting rising interest rates will revive the income banks make on loans. Recent Fed data showing sluggish loan demand in 2021 amid the government’s record amount of stimulus, has also shown signs of improvement.

Analysts predict a larger ratio of earnings from loans rather than a release of provisions for loan defaults will result in better valuations for bank stocks in the market, even if the total income decreased during the year.

“It is fair to say that 2022 is a transition year where basic income may be getting better but reported earnings are going down,” says O’Connor.

Demand for more loans in a higher interest rate environment will also allow banks to tap more from the large deposit base that has grown during the pandemic. At JPMorgan, America’s largest bank by assets, deposits grew more than 50% from the end of 2019 to September 2021 to $2.4 billion.

“When interest rates start to rise, that’s when you really start to see the real benefits of these deposits,” said Keith Horowitz, US banking analyst at Citigroup.

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