From the six major banks to see the US economy: loan recovery witness recovery, soaring costs hidden dangers
Us economy: Loan recovery witness recovery, cost surge hidden dangers Interest rate hike cycle is expected to thicken industry profits, but the recovery remains uncertain.The past year has been a bumper one for US banks, with jpmorgan Chase and Goldman Sachs reporting record full-year profits.The hot market has kept transaction interest at an all-time high, and strong demand for real estate has led to a return to peak mortgage lending.At the same time, the government’s fiscal stimulus and monetary tools kept non-performing loan rates low, making it seem that consumers and businesses are getting through the crisis with the help of the US government and the Federal Reserve.However, in the fourth quarter of last year, the overall profit growth of the banking industry slowed significantly, and the expansion of investment such as human costs and fintech, as well as the decline in market volatility became important risks weighing on earnings.Financial institutions are expected to benefit from a bottoming out in net interest margins as the Federal Reserve enters an interest rate hike cycle, but tighter stimulus policies and high inflation are likely to be headwinds for the economic recovery, while higher operating costs will also cause short-term disruptions to results.As an important indicator of the real economy, the performance of the banking sector is widely watched at the start of each earnings season.Banks’ bottom lines diverged after blowouts in the third quarter, with j.p. Morgan and Citigroup both Posting their worst earnings in the past seven quarters.Profits continued to be positively affected by the release of nearly $4.06 billion in provisions for bad loans at the big six banks last quarter.The hospitality, tourism and catering sectors were shaken by the outbreak of COVID-19 in 2020, and financial institutions offered loan repayment forgiveness programs, setting aside more than $35 billion to cover potential loan losses.These funds were gradually released as special government stimulus measures and the corporate loan assistance Act were enacted and had positive effects.Its impact on performance is expected to gradually diminish in the future.Investment banking continued to gain momentum, with Wall Street’s biggest firms raking in record advisory, equity and bond underwriting fees from big mergers, initial public offerings and deals involving SPAC, a special-purpose buy-out vehicle.Global IPO volumes hit $117 billion in the fourth quarter of 2021, the highest quarterly volume since 2010, according to Bloomberg data.Investment banking revenue at Citigroup and Goldman Sachs jumped more than 40% from a year earlier, while jpmorgan Chase and Bank of America also grew more than 20%.Meanwhile, a pick-up in loan demand shows the momentum of the economic recovery.Jpmorgan, Bank of America and Wells Fargo increased their loan portfolios by 6%, 3.4% and 3%, respectively.”Loan growth is very stable and very broad-based across global markets, wealth and consumers,” Alastair Borthwick, Bank of America’s chief financial officer, said on an earnings call.It is hard to see that trend being interrupted at the moment.”Wealth management has also become a pole of profit growth.Revenue from consumer and wealth management rose 19% to $1.97 billion in the fourth quarter.Morgan Stanley’s wealth management division saw a 10 per cent rise in revenue and $438bn in net new client assets for the year.Wells Fargo’s wealth and investment management business grew 6%.By contrast, industry profits are under pressure from a cooling trading business and rising operating costs.Some analysts believe that as the US stock market recovered from the “excitement” during the epidemic, the market with less volatility hit trading enthusiasm, buy and hold strategy reduced the overall turnover rate of the market, fixed income trading is weak.Morgan Stanley’s trading revenue fell 26 per cent from the previous month, while jpmorgan, Bank of America and Citi also saw declines of more than 10 per cent.In response, David Solomon, Goldman’s chief executive, said: “No one could have predicted the environment we have experienced over the past two years, particularly the markets over the last year, which has clearly been a tailwind for our business and we by no means believe this is a permanent environment that can last.”Labor costs and fintech spending have led to rapid expansion of noninterest expense items at many banks. Staff spending and tech investments in the fourth quarter pushed up operating costs 11% at j.p. Morgan, while noninterest expenses rose 6% at Bank of America. Goldman’s aggressive hiring and bonus payouts pushed up compensation costs 33% in the quarter.For the banking industry, this year will be full of opportunities and challenges.Reflecting investors’ approval of the sector’s prospects, financials are the second best performing sector in the S&P 500 after energy so far this year.The Fed’s entry into an interest rate hike cycle and demand for loans are seen as opportunities for financial institutions.The Fed signaled a march rate hike at its January 26 meeting, and fed funds futures show the odds of five hikes this year are already close to one in three.Jpmorgan Chief Executive Jamie Dimon said credit continued to be healthy and higher short-term interest rates would revive loan yields after a low interest rate environment that has left financial institutions struggling in their main businesses for nearly two years.Financial reporters noted that demand for credit from individuals and businesses remained stable in the early stages of the epidemic.A number of purchasing managers’ surveys have shown that businesses are generally optimistic about the economic outlook and plan to increase capital spending in the future.Meanwhile, U.S. consumer credit rose 11 percent in November to $4.415 trillion, Federal Reserve data showed.Credit card debt is growing at an all-time high.According to a Survey by LendingTree at the end of last year, more than a third of Americans borrowed money during the shopping season, with 62 percent using credit cards.Of course, the pandemic remains a major challenge for financial institutions, and inflation has become public enemy.The Labor Department said U.S. inflation had reached its fastest pace in nearly four decades, the supply chain impact of the Omicron strain continued, and higher prices for goods and services began to weigh on consumer demand and optimism about the economy, with the University of Michigan’s consumer sentiment index falling to a near 10-year low in January.On the earnings call, Goldman CEO Solomon warned that there are risks in the economy related to inflation.”After a recent period of accommodative monetary policy, inflation is likely to remain above trend for some time, and in the near term inflationary pressures are likely to continue to build before they begin to decline.As these easing policies are unwound, we are likely to see more volatility, which will have an impact on economic growth, asset prices and client activity.”He said.At its January rate-setting meeting, the Fed said it was closely monitoring the risk that rising wages could feed through to prices.Now Wall Street’s pay boom has gotten a lot of attention.Goldman Sachs employees, for example, will earn an average of about $404,000 in 2021, up from $329,000 in 2020, jpmorgan chase (JPM) paid bonuses 30% to 40% higher this year than a year ago, and Morgan Stanley (MS) further tied the performance of its wealth management and investment banking units to compensation.In addition to the fierce competition for human resources, banks are also investing heavily in areas such as fintech research and innovation. Jpmorgan plans to boost tech spending to $12 billion to prepare for expansion in data centers and cloud computing, as well as new markets such as the U.K. Morgan Stanley is leaning toward acquiring its technology.Short-term short-term labor and r&d spending may affect performance, j.p. Morgan expects annual costs will rise 8% to $77 billion, the changing environment and higher costs will mean return on tangible equity ROTCE intermediate-term goals may be lower than 17% this year, bank of America is expected to non-interest spending will grow by 6% this year.