Wall Street banks enter earnings season under a cloud of rising costs

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America’s biggest banks are reporting profits this week under pressure to curb rising costs, as Wall Street lenders pressured by rising wages and spending on tech to compete with fintech challengers.

Industry pioneers JPMorgan Chase and Bank of America have already raised their spending forecast several times for this year. Today, costs have become “a big wildcard for the quarter and for the outlook” for the industry, said John McDonald, senior analyst for large-cap banks at Autonomous Research.

For the third quarter, analysts expect bank profits to be supported by wealth management fees and a record amount of transactions, as well as the return of credit card fees that were waived during the pandemic.

Still, Wall Street analysts are forecasting a drop in revenues at JPMorgan, Citigroup and Wells Fargo, as a slight increase in lending is unlikely to offset the blow from historically low interest rates, according to FactSet data.

Costs have traditionally been viewed as the primary levers banks could use to manage profits in an industry heavily dependent on interest rates and credit cycles.

US heavyweights like JPMorgan have already responded to persistent headwinds on income from low interest rates and weak loan demand by closing branches and downsizing staff.

But those savings have so far been used to fund higher wages and tech spending and to bolster their businesses against their fintech competitors.

Analysts predict that JPM, Goldman, Morgan Stanley and Citi will report negative operating leverage in the third quarter, meaning costs have risen more year over year than revenues.

JPMorgan is the first bank to report results on Wednesday. BofA, Citigroup, Morgan Stanley and Wells Fargo report a day later, then Goldman Sachs on Friday.

Despite a brief recession, near-zero interest rates and sluggish loan demand, America’s largest banks have been able to print record profits over the past year thanks to an increase in trading income and massive reversals of loan loss provisions that sent billions of dollars directly. to their results.

However, the momentum of these trends is starting to fade, raising concerns about the industry’s long-term ability to boost profits.

Fixed income trading, which helped Goldman to record a record profit earlier this year, is expected to drop 20% industry-wide as trading returns to more normal levels, Coalition data shows Greenwich.

Banks have released 60% of the reserves they set aside to account for bad debts during the pandemic and future versions are expected to be much more modest, Goldman Sachs analysts say.

Adding to the expense burden is higher compensation driven by a costly war for talent on Wall Street, especially in roles where pay is tied to performance, like investment banking.

“The best producers are better paid,” said Jeff Harte, banking analyst at Piper Sandler.

Uncertain revenue forecasts put pressure on banks to keep costs under control as executives say more investment is needed in the business, creating a potential standoff between executives and their investors.

“We’re not running the business so that we can tell analysts what the spend count will be,” JPMorgan chief executive Jamie Dimon told analysts on last quarter’s earnings call after the bank increased his spending target.

Still, analysts, including RBC’s Gerard Cassidy, expect banks to start announcing broad cost-cutting initiatives soon to appease shareholders if spending continues to rise without higher revenues.

“While we expect 2021 to be a tough year for banks to keep their operating expenses under control,” RBC Capital Markets analysts wrote in a note, “banks showing they can manage effectively spending in the current environment will likely get better stock valuations. ”


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