NEW YORK (BLOOMBERG) – Evidence is mounting that Wall Street’s top investment banks spent the pandemic building up their leads.
As the banner year for markets came to a close, JPMorgan Chase & Co posted record profit in the fourth quarter, helped by a 20 per cent increase in revenue from trading, a business where it already ranked No. 1 heading into the turmoil. At rival Goldman Sachs, second only to JPMorgan in dealmaking, a flurry of transactions helped send its quarterly profit soaring 135 per cent.
The results – from JPMorgan on Friday (Jan 15) and Goldman on Tuesday – mirrored trends in many corners of industry and society during the shocks set off by Covid-19: The strong got stronger. The latest snapshots from Wall Street are emerging on the eve of Joe Biden’s inauguration as US president and amid the ascent of Democrats in the Senate and atop regulators, where critics may more closely scrutinize how companies succeeding in such bleak times use their profits.
“What you’re seeing is some institutions like JPMorgan and Goldman Sachs were well-positioned for what’s going on,” said Mark Doctoroff, global co-head of financial institution coverage at Mitsubishi UFJ Financial Group. “It was a foregone conclusion that investment-banking fees and trading were going to be higher, and of course that will benefit the JPMorgans and Goldmans versus the consumer-oriented banks like Bank of America or Citigroup.”
For the year, JPMorgan collected US$29.5 billion (S$39.2 billion) in revenue from trading. That was about US$8.6 billion more than Citigroup’s haul, the largest gap between the pair since at least 2011, according to data compiled by Bloomberg. JPMorgan’s dealmakers and underwriters increased their market share to the highest in a decade, chief financial officer Jennifer Piepszak told analysts.
“The extraordinary nature of this year has meant that we had records in almost every category for both the quarter and the full year,” she said.
Goldman’s dealmakers boosted the firm’s investment-banking fortunes by US$2.3 billion, a 34 per cent increase that was the biggest among the bank’s rivals. Its revenue from equity underwriting tripled.
Their earnings strength overshadowed results at Citigroup and Bank of America Corp, which released a combined US$2.3 billion from loan-loss reserves in the fourth quarter as consumers and corporations kept up with borrowings. That helped both companies post earnings that topped analyst expectations.
But JPMorgan chief executive officer Jamie Dimon argued that the profits produced from releasing reserves aren’t meaningful.
“We’re not going to be sitting here cheering about that, we’re cheering that Americans are doing better, but we don’t consider that earnings,” Dimon told analysts on a conference call last week. “It’s ink on paper.”
Morgan Stanley, the smallest of the six US banking giants, is set to report quarterly results on Wednesday.
‘Unlikely to repeat’
There are signs that such success may beget problems for Wall Street in an era in which coronavirus cases keep shaking the economy, leaving millions jobless. Ohio Democrat Sherrod Brown, the incoming chairman of the Senate Banking Committee, already has suggested he’d like to hear more regularly from the leaders of the country’s largest banks.
“They have a lot of power, and we need to know more about how they do their business,” Mr Brown said in comments to reporters this month. “The more we hear from them, the better.”
Meanwhile, the question is whether JPMorgan and Goldman can continue to widen the gulf between them and their rivals.
Goldman, for its part, said its backlog for investment banking has increased “significantly,” driven by activity in advisory and equity underwriting. JPMorgan said markets have remained active and that it’s seen a “strong performance since the start of January.”
But a capital-markets record in unusual times raises the bar high for setting the next one.
“The comps become difficult,” Jim Shanahan, a senior equity research analyst at Edward Jones, said in an interview. “There could be some drivers from the capital-markets standpoint that just seem unlikely to repeat.”