Denver, Düsseldorf The jacket boom is driving Wall Street banks’ profits. The dealmakers helped JP Morgan Chase have its best first quarter ever, with net income of $ 14.3 billion. That is almost five times more than a year earlier, as America’s largest bank announced on Wednesday.
Investment banking fees increased 57 percent year over year. Securities trading, which was seen as the main profit driver last year, is also still strong. Retail sales increase by 25 percent.
Goldman Sachs also got off to a strong start with record sales and earnings. Net income has also almost quintupled to $ 6.8 billion. However, a year ago, at the beginning of the pandemic, both banks increased their risk provisioning, which led to a slump in profits at the time and now makes the comparative values look particularly good.
Goldman’s investment banking fees rose 73 percent to $ 3.8 billion. Retail sales increased 47 percent to $ 7.6 billion. “We remain very well positioned to help our clients reposition themselves for recovery,” said Goldman CEO David Solomon.
Top jobs of the day
Find the best jobs now and
be notified by email.
The institutes benefited from three important developments in the first few months of the year.
- Capricorn prices in stocks like Gamestop, AMC and Koss have fueled stock trading. An unusual mix of small investors and professionals, some of whom coordinated via the Reddit forum “Wall Street Bets”, drove the stock markets and caused billions in losses for hedge funds like Melvin Capital, which had bet on falling stock prices. Goldman’s turnover from stock trading was $ 3.7 billion, as high as it was last over ten years ago.
- The boom in so-called Spacs gave investment banking a tailwind. Spac stands for Special Purpose Acquisition Company. These are shell companies that take over start-ups and thus make it easier for them to go public. In the first quarter, banks put more Spacs on the stock market than in the whole of last year. The business is lucrative because Spacs often have complicated structures and bring additional investors on board, which is orchestrated by financial institutions.
- The many economic stimuli from the government and the US Federal Reserve (Fed) are ensuring a recovery in the economy. This enables the major US banks to reduce loan loss provisions. The Fed expects the US economy to grow 6.5 percent this year, as much as it did in 1984.
Jamie Dimon, CEO of JP Morgan Chase, is therefore extremely confident about this year. Thanks to economic stimulus, a possible infrastructure package, continued support from the Fed, “strong balance sheets among private customers and companies, and the euphoria surrounding the potential end of the pandemic, we believe the economy has the potential to be extremely robust and grow for several years “Said Dimon.
He is the longest-serving boss of a Wall Street bank and has already successfully steered JP Morgan out of the financial crisis. Dimon assumes that the growth will reach those Americans who have been particularly hard hit by the pandemic.
Given the good outlook, JP Morgan also cut $ 5.2 billion in loan loss provisions. The bank has still set aside $ 26 billion for bad loans. That was “appropriate and careful,” emphasized Dimon.
Analysts point out that it is difficult to predict when and to what extent loans can default. Many Americans have benefited from the government’s three consumer checks and the good stock markets. Others, however, have been unable to pay their rent for months and have accumulated heavy arrears. Economists warn that this could become a problem in the coming months as the deferred rent payments come due.
At JP Morgan, credit card defaults were lower in the first quarter than before the corona crisis. According to CFO Jennifer Piepszak, many Americans used the last two government consumer checks primarily to pay off their debts and are now in the buying mood. “Consumers are now using their credit cards as often as they were before the crisis,” she clarified in a journalists’ conference.
When will the Spac boom end?
How long the Spac boom can be sustained is meanwhile unclear. Already now there is a cooling, the interest of investors is waning, which has to do with various scandals at start-ups such as Nikola, Lordstown Motors and Clover Health, which went public via Spac and had to record significant price drops.
The analysts are also concerned about the weak demand for credit, the core business of banks. At JP Morgan it was at the previous year’s level. Net interest income fell 11 percent to $ 13 billion. CEO Dimon assumes that the situation will improve in the second half of the year.
He pointed out that weak credit demand was a good sign for the economy as a whole. Consumers have reduced their debts significantly in some cases and are now starting to consume more again. “Large companies have access to the capital markets and use this to reduce their loans from the banks,” says Dimon.
Headwind for Wells Fargo
A number of small and medium-sized companies, on the other hand, received emergency loans from Washington as part of an aid program, which they do not have to repay under certain conditions.
The weak demand for credit, coupled with sustained zero interest rates from the central bank, also meant “headwinds” for Wells Fargo, as CEO Charlie Scharf admitted.
Thanks to the good economic situation, the crisis-ridden bank from San Francisco was also able to reduce risk provisions. It released provisions of $ 1.05 billion, resulting in net income of $ 4.7 billion – seven times more than a year earlier.
Bank of America and Citigroup will present their results on Thursday. Morgan Stanley will follow on Friday. Bank stocks have already gained significantly more than the broader S&P 500 this year and, according to Deutsche Bank analyst Matt O’Connor, still have a lot of potential this year. Goldman stock rose just under four percent in early New York trading. The Wells Fargo paper gained a good two percent, JP Morgan was slightly in the red.
More: Call for help from Wall Street bankers sparked debate about the future of finance.