U.S. banks should have plenty to cheer about as 2022 approaches. Investment banking fees continue to be supported by frantic trading and IPOs. Loan demand, after nearly two years of weak to negative growth, is showing signs of improvement. Elsewhere, interest rate hikes – the first of which could come as early as March – will ultimately lead to a recovery in earnings and interest margins.
Expectations that the industry is poised for another bumper year sent banking stocks soaring. The KBW banking index is up 8% so far this year, following a 35% gain in 2021. Stocks like Goldman Sachs, Morgan Stanley, JPMorgan and Bank of America have all hit new highs in recent weeks.
But this spectacular recovery of the sector also leaves room for disappointment. In particular, the success of investment banking has resulted in increased costs and overheads.
For proof, look no further than the beating JPMorgan suffered on Friday. Investors wiped nearly $28 billion from the bank’s market value after the company reported significantly higher spending in the fourth quarter and warned of further increases this year.
Similarly, Citigroup’s operating expenses, excluding the impact of asset disposals in Asia, rose 8% in the last quarter. Its efficiency ratio – which measures how much it costs to produce a dollar of revenue – jumped nearly 12 percentage points to 79.5%.
Banks are under pressure to raise their salaries to prevent rainmakers from defecting after a record year for transactions. The need to invest heavily in technology to keep fintech start-ups at bay only adds to the expense burden.
JPMorgan warned that soaring costs and moderating revenues on Wall Street could mean the bank misses its 17% return on equity target. The bank has a history of upside surprises. But top bank executives are no doubt hoping its vanilla loans, for once, can boost the group’s profits in 2022.
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