The big five Wall Street banks generated a record $55 billion in revenue last year by issuing stocks and bonds and providing M&A advice to companies. This figure is up 40% from 2020, mainly due to a large number of acquisitions and the listing of special purpose acquisition companies (SPAC). Goldman Sachs Group (GS. US) leaders point out that due to recent disruptions in the supply chains of many companies, companies are being forced to consider more acquisitions in order to scale up.
Investment bank executives stressed on earnings call earnings that they expect to close more M&A deals this year. David Solomon, CEO of Goldman Sachs, told analysts this week: "From the current perspective, we believe M&A activity will continue to be driven by a variety of factors." "Interestingly, uncertainty in the market environment actually fuels this momentum as it forces companies to work hard to find ways to strengthen their competitive position."
Last year, Wall Street's investment banking business revenue rose sharply
In fact, in the past year, the loan business has not improved much, and the net interest income of the entire financial industry has actually been squeezed. In addition, many companies face rising costs as the ongoing battle for talent forces companies to pay more. The prosperity of investment banking business can be described as a carbon in the snow for banks. At the same time, the sharp rise in investment banking business also boosted the revenue of banks last year.
The following sections of this article discuss some of the megatrends that emerged in the financial industry in mid-year:
Interest income declined
In the fourth quarter, the four largest U.S. banks (BAC. US), Citigroup (C.US), JPMorgan Chase (JPM. US) and Wells Fargo (WFC. US)) total loans rose slightly. For the full year, however, net interest income fell sharply by $9 billion.
Net interest income fell for the largest banks
In addition, JPMorgan Chase & Co. surpassed Citigroup to become the world's largest credit card issuer in the fourth quarter of last year. The bank hopes credit card customers will resume normal lending activity this year, which is expected to help increase the bank's net interest income by more than $5 billion.
The Battle of Credit Cards
As part of their push to borrow and spend on credit cards, many banks have reduced their promotional activities for this type of business at the start of the COVID-19 pandemic. But as the pandemic receded, banks began to look for new customers.
In 2021, institutions are working to generate more revenue through their respective credit card businesses. This is mainly due to the fact that the subsidence of the epidemic has pushed consumers to start traveling and eating out.
Citigroup, Bank of America and Wells Fargo all reported a surge in the number of new credit card accounts in the fourth quarter of last year, when they all ramped up marketing for new credit card products. Citigroup Chief Financial Officer Mark Mason told analysts this week: "With the number of new customers increasing by 43 percent, we see encouraging potential in the credit card business."
Decline in trading business
For months, the banking industry has warned that their trading operations will not be able to continue their previous growth trend. It is understood that the total transaction volume of the five major banks on Wall Street fell to $101 billion in 2021, a decline of 5.8%, which is the first decline in nearly four years.
As central banks around the world rapidly roll out new monetary and fiscal policies to combat inflation, many companies believe there is an opportunity for trading revenues across the industry to grow again. Morgan Stanley (MS. SHARON Yeshaya, chief financial officer of the US), said on Wednesday: "I think trading activity is going to get very active." "As interest rates rise, different types of products in the market generate different volatility, which helps investors get more returns and asset diversity."
Compensation costs
Driven by rising compensation costs, spending across the financial sector soared in the fourth quarter of last year. In the face of inflation, increased competition and tight labor markets, banks have been forced to increase the number of technicians and raise the wages of employees at all levels.
In 2021, the compensation costs of the six major U.S. banks will rise
In 2021, the six major U.S. banks allocated a total of $177.7 billion to employee compensation, up 12 percent from the same period a year earlier. At the same time, higher compensation expenses also brought the total cost of spending more than $300 billion for the first time. Bank of America Chief Financial Officer Alastair Borthwick told the reporter on Wednesday: "On the expense side, our revenue-related costs have increased."
It is reported that in the recent past, JPM. US) plans to increase the compensation of junior employees for a second time within six months. Investment bankers in JPMorgan's first year on the job will receive $110,000 a year in compensation, up from the previous $100,000. That's a nearly 40 percent increase compared to $80,000 in compensation at the beginning of 2021. Analysts were paid $125,000 in their second year and $135,000 in their third year.
Goldman Sachs' latest quarterly earnings report also shows that the bank has increased the proportion of fixed costs in compensation expenses. In addition, the bank has introduced more benefits such as parental leave and pensions.