Morgan Stanley reported fourth-quarter profit on January 19 which beat market expectations, outperforming rivals.
Its results rounded out a mixed earnings season for the nation's largest banks that cashed in on the M&A wave, but were dragged down by weak trading and higher expenses, which swelled as they spent heavily to retain key personnel in a race for talent.
JPMorgan and Citigroup each reported the smallest earnings beats in the last seven quarters, and Goldman Sachs missed estimates for fourth-quarter profit because of elevated expenses. Wells Fargo has been the sole bright spot so far in bank earnings after it gave targets for higher interest income and lower expenses.
Pay Pressure
JPMorgan Chase reported record profits for the year on last Friday, and Citigroup’s annual profit more than doubled. But both banks said the costs of doing business were going up: Higher compensation curbed their final quarterly earnings of 2021.
“We want to be very, very competitive on pay,” Jamie Dimon, JPMorgan’s chief executive, told analysts on a conference call Friday. “There’s a lot more compensation for top bankers and traders and managers, who I should say, by the way, did an extraordinary job in the last couple years.”
JPMorgan, the country’s largest bank by assets, posted a record $48.3 billion in profit in 2021, but its profit in the three months ending in December fell 14 percent, to $10.4 billion, from the same quarter in 2020, despite a 37 percent jump in fees collected by its investment bankers.
Revenues were roughly flat for the quarter, and much of the decline in profit was a result of raising pay and spending more on technology, the company said in its earnings statement.
“There is a war for talent — it’s real,” and it will probably spark higher compensation across Wall Street, said David George, a senior bank analyst at Robert W. Baird & Company in St. Louis. JPMorgan’s position as an industry leader means that “if they’re going to spend a lot of money, others are going to have to follow suit or else they’ll be vulnerable,” Mr. George said.
Two other banking giants — Citigroup and Wells Fargo — also reported higher annual profits on last Friday. Top executives from all three banks were quizzed on earnings calls about inflation, which has climbed to the highest level in four decades.
While rising prices are making businesses more uncertain about the future of the pandemic-stricken economy and knocking consumer confidence as housing, gas and food become more expensive, they have also helped American workers clinch higher incomes.
“There’s a lot of competitive pressure out there on wages and pay,” affecting everyone from senior staff to entry-level employees at Citigroup, Mark Mason, the bank’s chief financial officer, told journalists on a conference call.
Jane Fraser, Citigroup’s chief executive, told analysts that the company planned to change its compensation structure for executives and leaders of business units to give them more stock instead of cash as an incentive to boost performance.
Unlike its rivals, which disclosed soaring compensation costs for Wall Street personnel in the quarter, Morgan Stanley kept a lid on expenses. The bank posted $5.49 billion in compensation expenses, essentially unchanged from a year earlier and below the $5.98 billion estimate of analysts surveyed by FactSet.
That’s in stark contrast to Goldman Sachs, where pay costs surged 31% to $3.25 billion.
Goldman Sachs is “committed to rewarding top talent” in a competitive labor environment, Chief Financial Officer Denis Coleman said during a call with analysts Tuesday. While the bank doesn’t expect operating expenses to rise materially from here, it will continue to spend on technology and engineering, he said.
It was still a banner year for banks
While the fourth-quarter results at JPMorgan and Citigroup may have taken some shine off 2021, it was still a banner year.
Banks’ consumer divisions recovered as Americans emerged from pandemic shutdowns and spent more on goods, travel and entertainment. And lenders cashed in as they advised companies on a flurry of mergers and acquisitions.
JPMorgan blew away its prior record profit, posting $48.3 billion.Like JPMorgan, Citigroup reported lower fourth-quarter profit, sliding 26 percent to $3.2 billion but still exceeding analyst forecasts. For the year, profit nearly doubled, to $21.9 billion.
Wells Fargo bucked the quarterly trend: Profit increased 86 percent to $5.8 billion. And full-year profit rose to $21.5 billion in 2021 — more than six times that of 2020, when the company stockpiled rainy-day funds in case of a surge in loan defaults that did not materialize.
Morgan Stanley’s CEO James Gorman said in the release that his firm posted record revenues for the full year 2021, helped by strong results across the firm’s major businesses. Its giant wealth management division, a key element of Gorman’s strategy that was grown through several splashy acquisitions, grew client assets by nearly $1 trillion in the year to $4.9 trillion, he said.
Although pay costs surged, Goldman Sachs’s full-year net profit of US$21.2bn was more than double the year before, making it biggest year.
The outlook for banks remains strong.
“With all respect to the fact that people are suffering in Covid and all that, the fact is, in spite of Omicron, in spite of supply chains, 2021 was one of the best growth years ever,” JPMorgan Chief Executive Jamie Dimon told analysts. “And 2022 looks like it will be actually pretty good.”
Demand for loans is on the rise, and anticipated increases in short-term interest rates should revive lending profits, one area where banks have struggled.
Fed officials signaled that they could raise rates as soon as March, earlier than previously expected, and banks are keeping a close eye on any developments that could change those calculations. Higher rates allow banks to charge more on loans, which increases their lending profits. And since banks are already awash in deposits, they can afford to be stingy about raising the rates they pay.
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