In Wall Street Earnings Season, Costs Are Weighing Heavily on the Big Banks

Image Credit: iStock, Massimo Giachetti

Sign up for smart news, insights, and analysis on the biggest financial stories of the day.

America’s big banks report earnings this week — JPMorgan on Wednesday, then Bank of America, Citigroup, Morgan Stanley and Wells Fargo on Thursday, and finally Goldman Sachs on Friday.

As a group, they’ve made record profits throughout the pandemic and their stocks have been among the best performers in 2021.

So are analysts expecting more of the same? Nope.

Doubly Squeezed

In many ways, America’s big banks just pulled off a miracle. They brought in record sums despite a global pandemic, a recession, interest rates hovering near zero, and loan demand weaker than a wet napkin.

There are two reasons why. For one, trading revenues soared as stock markets went on a frenzied rally. And the reversal of loan-loss provisions that the banks stockpiled to fend off worst-case pandemic scenarios — which never emerged — allowed them to shuffle billions back into their pockets.

But now, Covid-era trends are wearing off. Markets are cooler, 60% of the reserves the big banks set aside for bad loans have been returned, and loan demand is still weak. In the second quarter alone, costs at the big banks also soared $6.6 billion, or 10%, as the industry sought to fend off fintech challengers with investments in technology and staffing. All of it has the experts seeing a slowdown:

  • The S&P 500-listed banks are forecast by Wall Street analysts to report $31 billion in combined profits this week. That’s a 20% increase from a year ago, but down 20% from the second quarter, according to FactSet.
  • Bank stocks have been among 2021’s market leaders, but the KBW Nasdaq Bank Index — which is up 40% on the year — was flat in the third quarter.

Closing Down Shop: In the first six months of 2021, Wells Fargo, Citigroup, and JPMorgan closed over 250 branches to offset low rates and sluggish loan demand. Many analysts anticipate more cost-cutting as high expenses clash with slower revenue growth.

Goldman’s Grouse: Fixed income trading — which Goldman made $3.9 billion from in a record first quarter — is forecast to fall 20%, according to data from Coalition Greenwich. At least it’ll give staff there something to complain about that isn’t their CEO’s latest side hustle as a club DJ.