Wall Street banks will report record profits for 2021

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Wall Street’s largest banks are set to report record profits for 2021 this month, thanks to high investment banking fees and lower-than-expected credit losses during the pandemic. Analysts warn that it can take years to repeat such stellar gains.

Citigroup and JPMorgan Chase will be the first major banks to release their fourth quarter results on January 14th. This is followed by Goldman Sachs on January 18th, and then Morgan Stanley and Bank of America on January 19th.

Of these, analysts predict that all but Citi will report the highest full-year earnings ever, according to estimates from Bloomberg and historical earnings data from S&P Capital IQ.

“You may have to go through 2024 before profits are higher than 2021,” said Matt O’Connor, research director for large-cap banks at Deutsche Bank.

Still, the prospect of Federal Reserve rate hikes in 2022 feeds optimism that banks could be adjusted for another strong year.

“We expect bank stocks to continue to outperform the market in 2022,” Barclays analyst Jason Goldberg wrote in a client note this week.

The 2021 result was flattered by the release of reserves that banks had earmarked to cover potential losses on loans they feared could sour from the pandemic.

So far, losses are far less common than feared. Goldman analysts estimate that the big seven banks, which include JPMorgan and Bank of America, have now released $ 36 billion of the original $ 50 billion they originally raised in anticipation of credit losses.

Banks have also benefited from blockbuster investment banking fees, with global mergers and acquisitions hitting its highest level on record in 2021.

“People don’t think that levels like this are necessarily normal in 2021, especially in fee-paying capital markets operations,” said Devin Ryan, an analyst at JMP Securities.

So far, banks have used the profits to invest in technology, pay out bonuses and buy back their own shares.

After such a great year, investors are wondering whether 2021 will be “peak profits” for big banks, according to Richard Ramsden, a bank analyst at Goldman Sachs.

“What investors are trying to figure out is, has the market over- or undervalued the rate option embedded in bank stocks?” Said Ramsden.

At the moment the market is pricing in another good year for banks. US bank stocks rose 35 percent in 2021, according to Deutsche Bank analysts, outperforming the S&P 500 and rising again in the first few days of 2022.

Percentage growth line graph showing bank stocks outperformed the broader market in 2021

Investors are betting that rising interest rates will revive banks’ credit income. Credit demand, which was sluggish in 2021 amid record levels of government stimulus, has also shown signs of improvement, recent Fed data showed.

Analysts predict that increasing the proportion of earnings from credit, rather than unwinding credit risk reserves, would result in better valuation of bank stocks by the market, even if overall earnings for the year were lower.

“It’s fair to say that 2022 will be some kind of transition year, where underlying earnings are likely to get better but reported earnings are going down,” said O’Connor.

Greater demand for credit in an environment of higher interest rates would also allow banks to get more out of the large deposit base that has swelled during the pandemic. At JPMorgan, the largest U.S. bank by assets, deposits rose more than 50 percent to $ 2.4 trillion from late 2019 to September 2021.

“When interest rates rise, says Keith Horowitz, US banking analyst at Citigroup,” then you really see the real benefit of those deposits. “


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