The biggest Wall Street banks are expected to post record profits for 2021 this month thanks to windfall investment banking fees and lower than expected loan losses during the pandemic, analysts warning it could take years to repeat such stellar benefits.
Citigroup and JPMorgan Chase are the first major banks to report fourth quarter results on January 14. They are followed by Goldman Sachs on January 18, then Morgan Stanley and Bank of America on January 19.
Of those, analysts expect all but Citi to release their highest annual earnings on record, according to estimates compiled by Bloomberg and historical earnings data from S&P Capital IQ.
“You may have to go until 2024 before profits are higher than in 2021,” said Matt O’Connor, head of large-cap bank research at Deutsche Bank.
Nonetheless, the prospect of an interest rate hike by the Federal Reserve in 2022 fuels optimism that banks could be set for another solid year.
“We expect bank stocks to continue to outperform the market in 2022,” Barclays analyst Jason Goldberg wrote in a note to clients this week.
Profits in 2021 were flattered by the reserve releases that banks had set aside to cover potential loan losses that they feared could turn sour due to the pandemic.
Losses have so far turned out to be much less frequent than feared. Goldman analysts estimate that the seven big banks it covers, including JPMorgan and Bank of America, have now released $ 36 billion of the $ 50 billion they initially allocated in anticipation of loan losses.
Banks have also benefited from successful investment banking fees, with global mergers and acquisitions in 2021 reaching their highest since all time highs.
“People don’t think that, especially for fee-paying capital markets companies, these types of levels seen in 2021 are necessarily normal,” said Devin Ryan, analyst at JMP Securities.
So far, banks have used their profits to invest in technology, pay bonuses, and buy back their own stocks.
After such a big year, investors are wondering if 2021 has been a “peak in profits” for the big banks, according to Richard Ramsden, banking analyst at Goldman Sachs.
“What investors are trying to figure out is whether the market has overvalued or undervalued the rate option embedded in bank stocks? Ramsden said.
Right now, the market is anticipating another good year for the banks. Shares of U.S. banks rose 35% in 2021, Deutsche Bank analysts said, outperforming the S&P 500, and surged again in the first days of 2022.
Investors are betting that rising interest rates will boost the profits banks make from loans. Loan demand, which was sluggish in 2021 amid a record amount of government stimulus, has also shown signs of improvement, recent data from the Fed showed.
Analysts predict that a greater proportion of loan earnings instead of the release of loan loss reserves would better value market bank stocks, even if total earnings are lower for the year.
“It’s right that 2022 is kind of a transitional year where underlying earnings are likely to improve but reported earnings decline,” O’Connor said.
An increased demand for loans in an environment of higher rates would also allow banks to make the most of the large deposit base that swelled during the pandemic. At JPMorgan, the largest US bank by assets, deposits increased by more than 50% from late 2019 to September 2021 to reach $ 2.4 billion.
“When rates start to rise,” said Keith Horowitz, US banking analyst at Citigroup, “that’s when you really start to see the real benefit of these deposits.”