The Business Times

Uncertainties worry JPMorgan, Goldman investors

Despite record revenues, they shift focus to rapidly rising costs, worse-than-expected slump in fixed-income trading

Published Thu, Jul 15, 2021 · 05:50 AM

New York

INVESTMENT bankers inside Wall Street's marquee firms are pulling in more money than just about ever before to prop up earnings. The response from shareholders: Look at all the other problems.

Record revenue generated by dealmakers at JPMorgan Chase & Co and the second-best haul ever by their peers at Goldman Sachs Group, failed to distract from a worse-than-expected slump in fixed-income trading, rapidly rising costs and uncertainties for the future. Both firms beat analysts' profit estimates.

While the results showed that consumers are starting to emerge from pandemic lockdowns and that banks are finding ample opportunities to profit as companies adjust their businesses, investors dwelled on other issues. Will the flurry of activity on Wall Street force firms to boost pay? How long will it take to reverse stagnating demand for loans and recover from persistently low interest rates that weigh on lenders' revenue?

"The bottom line: a solid quarter in the books, with market-related activity, consumer-spending levels, and credit quality all underscoring the strength and the speed of the economic recovery," Susan Roth Katzke, an analyst at Credit Suisse Group, said in a note about JPMorgan's results. "When that strength manifests in higher interest rates and broad-based loan growth - part two of the recovery - is the outstanding question."

In many ways, the quarter was a reversal from a year ago, when traders reaped massive windfalls on wild market swings and the economic outlook was somewhere between murky and dire. Now, as that trading surge tapers, dealmakers are racing to keep up with demand as companies bolster finances, pursue takeovers and take other steps to realign their strategies for an improving landscape. Consumers are shopping and travelling again, too.

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Bank stocks have baked much of that in already. The S&P 500 Financials Index was up 26 per cent this year - outpacing a 17 per cent gain in the broader S&P 500 - before JPMorgan and Goldman kicked off the industry's midyear earnings reports. Investors were eager to find out what's next.

JPMorgan emphasised that there are uncertainties in forecasting net interest income. Consumers are spending more, but with stimulus payments, making it harder to predict whether that will translate into higher balances on credit cards. The bank stuck by guidance for US$52.5 billion in net interest income, after missing analyst estimates for the quarter.

JPMorgan's costs climbed 4 per cent to US$17.67 billion, topping the US$17.45 billion average of estimates compiled by Bloomberg. Expenses will probably jump 6.5 per cent to US$71 billion for the full year, it said.

The bank's higher expenses and its net interest income miss "could overwhelm an otherwise strong Q2", despite its positive performance in other areas, said Steven Chubak, an analyst at Wolfe Research.

The expense jump may partially come amid pressure on Wall Street to pay competitively amid the deluge of deals. It has been hiring to keep up with customer demand. The division's headcount climbed 2 per cent to 64,261 during the quarter.

"If we can hire great bankers, we're going to spend it," JPMorgan CEO Jamie Dimon told analysts. The bank's fees from underwriting and advisory jumped 25 per cent to US$3.57 billion, handily beating the US$3.13 billion average of analyst estimates compiled by Bloomberg. Advisory fees alone jumped 52 per cent to US$916 million.

Both JPMorgan and Goldman said the spread of Covid-19's delta variant is creating uncertainty that could affect the recovery and dealmaking. "Our backlog levels remain extremely high," Goldman CEO David Solomon told analysts. It feels as if demand will last, he said. "Obviously if there was some sort of disruption or economic slowdown sometime in the future that would wear on confidence and slow that, but that doesn't seem likely." For Goldman Sachs, the flurry of initial public offerings in the second quarter helped boost total investment banking fees 26 per cent to US$3.45 billion, well above the US$2.92 billion average of analyst estimates compiled by Bloomberg. The firm said it was also aided by a jump in the number of completed mergers and acquisitions.

It shaved almost US$2 billion in expenses from a year earlier - when legal costs were high - but that was still less than analysts anticipated. Payroll costs were up 18 per cent from a year earlier, though it noted that rose in tandem with revenue.

Both firms' traders, meanwhile, have struggled to repeat last year's dizzying performance. Revenue from trading fixed income, currencies and commodities dropped by roughly 45 per cent at both JPMorgan and Goldman Sachs. BLOOMBERG

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