America’s Big Banks like JP Morgan, Bank of America, Wells Fargo, Goldman Sachs, Citi and Morgan Stanley reported their quarterly earnings during the week – exceeding analysts’ expectations both on the top line and bottom line – largely attributed to reserve releases and strong investment banking revenues. The booming trading revenues across Wall Street has largely benefitted these banks’ investment banking business during the entire part of the pandemic since the beginning of 2020. The returns of most of these banks have exceeded the YTD returns of the KBW Nasdaq Bank Index (BKX) for 2021 (graph below).
Exhibit 1: Big Banks YTD returns vs. KBW Nasdaq Bank Index (BKX) returns YTD 2021
Source: Yahoofinance.com, October 2021
JP Morgan (JPM)
The company posted better-than-estimated quarterly earnings on both revenue and earnings numbers and continues to report yet another quarter of beating analysts’ forecasts of earnings and revenue seen over the previous five quarters (graph below). The gains came in after the bank released $2.1 billion in reserves as the economic outlook continues to improve despite the impact of the Delta variant and supply chain disruptions. The bank set aside billions of dollars for the losses in 2020 due to the impact of the coronavirus pandemic which was not utilised and is being released in recent quarters.
Exhibit 2: Historical earnings and revenue forecasts in the last few quarters since April 2019
Source: Investing.com, October 2021
Key Highlights
- Revenues: $30.44 billion vs. $29.8 billion (analysts’ estimates).
- Earnings Per Share (EPS): $3.74 per share vs. $3.00 per share (analysts’ estimates)
- Overall revenues rose 2% to $30.4 billion, average loans rose 5%, average deposits rose 19%
The revenues for the quarter rose 2% to $30.4 billion which was largely driven by the bank’s investment banking and asset and wealth management divisions. The increasing levels of M&A deals and IPO issuances during the quarter helped the bank boost its investment banking revenues. The firm-wide return on equity (ROE) was reported at 18% and the bank saw an overall average loans growth of 5% along with an average deposits growth of 19% during the quarter.
Exhibit 3: Segment-wise revenues for the quarter
Source: Q3 Earnings Report, October 2021
Sector Highlights
Consumer & Community Banking (CCB) segment: consists of the banks’ consumer and business banking, home lending, and car and auto sub-segments. The segment reported revenues of $12.52 billion during the quarter, down 3% quarter-on-quarter.
- Average deposits were up 20% and clients’ investment assets were up 29%.
- Debit and credit card sales volumes were up 26% and active mobile customers were up 10%.
- Average loans were down 2% year-on-year and up 1% quarter-on-quarter.
Corporate and Investment Banking (CIB) segment: The CIB segment, which largely consists of the banks’ banking and markets and securities services reported revenues of $12.40 billion – up 7%, with net income of $5.6 billion – up 29%.
- The segment generated an ROE of 26%.
- Ranked #01 for global investment banking fees with 9.4% wallet share YTD.
- Banking revenues came in at $4.9 billion – up 30% and Investment banking revenues of $3.0 billion is up 45% – driven by higher IB fees (up 52%) reflecting higher advisory and equity underwriting fees.
- Total markets revenue of $6.3 billion was down 5%, and the fixed income markets revenues were down 20% to $3.67 billion – below the analysts’ estimates of $3.73 billion – largely on account of lower revenues in commodities, rates and spread products as compared to the prior year.
- However, the losses were pretty much made up by the 30% growth in equity markets’ revenue of $2.6 billion – higher than the consensus estimates of $2.16 billion – driven by performance across products. Securities services revenue was higher by 9% at $1.1 billion – largely driven by fee growth.
Commercial Banking (CB) segment: which consists of the banks’ commercial banking activities, reported revenues of $2.52 billion, up 10% – largely driven by higher revenues from investment banking and wholesale payments.
- The segment generated an ROE of 22%.
- Average loans were down 1% quarter-on-quarter and the average deposits were up 21% during the quarter.
Asset and Wealth Management (AWM) segment: reported revenues of $4.30 billion – up 21% – primarily attributed to higher management fees and growth in deposit and loan balances.
- The segment reported an ROE of 33%
- Assets Under Management (AUM) reported at $3.0 trillion up 17% driven by higher market levels along with cumulative net inflows.
- Average loans were up 20% year-on-year and 3% quarter-on-quarter while the average deposits were up 41% during the quarter.
Outlook for the year
The stock has rallied over 30% YTD in 2021 and continues to have a positive outlook on the back of improving loan growth which is likely to pick up steam in the coming quarters driven by higher spending and increasing debts by credit-card users. The management expressed that the banks’ investment banking deals are likely to continue as the acquisitions are potentially high for next year too.
Bank of America (BAC)
Bank of America, which is the second-largest bank in the U.S. by assets, reported its third-quarter results which beat analysts’ estimates, and the stock climbed nearly 5% post its strong earnings and revenue growth. The banks’ investment banking division continued to generate strong revenues with record client balances. Credit quality showed signs of improvement and net interest income (interest earned on loans and securities (after deducting interest costs) were the key drivers of the overall revenues along with asset management fees and strong investment banking revenues.
Key Highlights
- Revenues were up by 12% year-on-year to $22.8 billion.
- Net income was higher by 58% to $7.7 billion or 0.85 per diluted share.
- Net interest income (NII) was up by $1 billion or 10% year-on-year to $11.1 billion, driven by strong deposits growth and related investment of liquidity and Paycheck Protection Program (PPP) activities.
- Non-interest income was up by 14% to $11.7 billion, driven by record asset management fees, strong investment banking revenues along with higher sales and trading revenues.
- Average loans and lease balances among business segments increased by $14 billion quarter-on-quarter to $903 billion – which grew by 21%.
- Average deposits were up by $247 billion or 15% to $1.9 trillion.
- Expenses in the quarter were the lowest in 2021 and improved credit quality.
Exhibit 1: Return to pre-pandemic organic growth of key metrics (year-on-year growth)
Source: Bank of America, Quarterly Earnings Report, October 2021
Business segment highlights
Consumer Banking: Net income of $3.0 billion
- Deposit balances exceeded $1.0 trillion for the first time – up by 16%.
- Combined credit and debit card spending were up 21% to $201 billion (credit up 26% and debit up 17%).
- Consumer investment assets rose by 32% to a record $353 billion – driven by market valuations and strong client flows.
Global wealth and investment management (GWIM): record net income of $1.2 billion
- Record client balances of $3.7 trillion – higher by 20%.
- Deposits were up 16% to $339 billion.
- Record AUM balances of $1.6 trillion higher by 23%.
- Merrill Lynch Wealth Management added 4,200 net new households, and Private Bank added 275 net new relationships during the quarter.
Exhibit 2: Segment-wise revenues for the quarter
Source: Bank of America, Quarterly Earnings Report, October 2021
Global Banking: Net income of $2.5 billion
- Total investment banking fees increased by record levels of $2.2 billion up 23%
- Record advisory fees of $654 million which was up 65%
- Deposits were higher by 13% to $534 billion
- Raised $221 billion in capital on behalf of clients in Q3, 2021 and $728 billion YTD.
Global Markets: Net income of $926 million
- Sales and trading revenues were higher by 12% to $3.6 billion. (Fixed Income, Currencies and Commodities (FICC) revenue of $2.0 billion and Equities revenue of $1.6 billion)
- Average assets increased to $805 billion driven by higher client balances in equities and loan growth.
Exhibit 3: Segment-wise and portfolio-wise quarterly average loans and leases growth
Source: Bank of America, Quarterly Earnings Report, October 2021
Lowest expenses reported during the quarter in 2021
For the first time, in several quarters the bank had a good quarter in terms of expenses. The expenses during the quarter were lower at $14.4 billion (about $600 million lower than the second quarter) and an efficiency ratio (total expenses as a percentage of total revenue) of 63% during the latest quarter(graph below).
Exhibit 4: Quarterly non-interest expenses and efficiency ratio
Source: Bank of America, Quarterly Earnings Report, October 2021
Exhibit 5: Segment-wise quarterly average deposits growth
Source: Bank of America, Quarterly Earnings Report, October 2021
Outlook for the next quarter
The management expressed that there could be lesser interest income from Paycheck Protection Program (PPP) loans in the coming quarter but that decline is likely to be offset by modest loan growth by way of investing excess liquidity into securities and would expect lower expenses from the premium amortisation. Looking ahead, the banks’ investment banking pipeline remains strong in the coming quarters driven by rising merger and acquisition activity, a trend seen across the investment banking industry. Bank of America is now ranked fourth, with a 6.9% market share of the investment banking fees.
Goldman Sachs (GS)
Goldman Sachs reported its third-quarter results, which showed continued strength in the overall performance of the company. The bank reported a 26% increase in revenues to $13.61 billion during the quarter and a 63% increase in profits to $5.28 billion along with an increase in investment banking revenues of 88% to $3.70 billion. The revenues beat analysts’ estimates reporting a 90% surge in investment banking revenues and a record fee from equity financing. The bank remained #1 worldwide in completed mergers and acquisitions, and in worldwide equity and equity-related offerings and IPOs for 2021 year-to-date. The stock has traded higher all through the year with around 47% gains YTD 2021 exceeding the index returns.
“The third quarter saw strong operating performance and an acceleration of our investment in the growth of Goldman Sachs. We announced two strategic acquisitions in our Asset Management and Consumer businesses which will enhance our scale and ability to drive higher, more durable returns. Looking forward, the opportunity set continues to be attractive across all of our businesses and our focus remains on serving our clients and executing our strategy.”
By David M. Solomon
Chairman and CEO
Key Financial Highlights
Source: Goldman Sachs Quarterly Earnings Report, October 2021
Business segment highlights
During the first nine months, the company generated net revenues of $46.70 billion and net earnings of $17.70 billion with a diluted EPS of $48.59, each surpassing the previous full-year records.
Investment banking segment generated its second-highest quarterly net revenues of $3.70 billion, reflecting the banks’ record quarterly revenues in financial advisory and continued strength in underwriting and M&A activities.
Global markets segment generated net revenues of $5.61 billion – primarily reflecting strong performance in equities, and the second-highest fixed income, currency and commodities (FICC) financing net revenues.
Asset management segment Net revenues in the segment were $2.28 billion for the quarter – which was 18% lower than a year ago. The decrease in revenues was primarily due to lower net revenues in equity investments. Additionally, net revenues in lending and debt investments were lower during the quarter while incentive fees remained higher.
Consumer and wealth management segment reported net revenues of over $2 billion for the first time which was 35% higher than a year ago and 16% higher than the second quarter of 2021. Management and other fees were significantly higher reflecting the impact of higher average assets under supervision in the wealth management business. On the Consumer banking side, net revenues came in 17% higher from a year ago at $382 million reflecting higher credit card and deposit balances.
Exhibit 1: Segment-wise Net revenues for the quarter
Source: Goldman Sachs Quarterly Earnings Report, October 2021
Exhibit 2: Quarterly revenue break-up among the business segments
Source: Goldman Sachs Quarterly Earnings Report, October 2021
Lending highlights
- Total loans increased by $12 billion (up 9% quarter-on-quarter) to $143 billion reflecting an increase across the portfolio.
- Total allowances were $4.17 billion, slightly higher on a quarter-on-quarter basis. ($2.78 billion for wholesale loans, and $1.39 billion for consumer loans).
Exhibit 3: Total loans of the bank at the end of the quarter
Source: Goldman Sachs Quarterly Earnings Report, October 2021
Outlook for the next quarter
While most of the other big banks released loan loss reserves during the quarter to bolster their third-quarter revenues, Goldman Sachs has shown consistent growth in business during the quarter and is likely to continue in the next few quarters as well. The company announced the acquisitions of NN Investment Partners and a fintech lender, GreenSky, for a $2.24 billion deal, which is likely to close by the first quarter of 2022. This deal could help the bank accelerate its strategy to drive higher and more durable returns post the acquisition. The management also announced the current CFO, Stephen Scherr, would step down by year-end and will be replaced by Denis Coleman, who is the current co-head of the banks’ Global Financing Group.
Conclusion
Overall, the banks have posted a good set of quarterly numbers beating Wall Street’s expectations, and as per FactSet estimates, banks in the S&P 500 have added up to $31 billion in aggregate profits which is up roughly about 20% from a year ago. Earnings estimates have come in higher for the banks during the quarter largely driven by favourable economic conditions and higher treasury yields which have benefitted banks’ bottom lines in terms of the core lending businesses. These large bank stocks and the banking index is likely to remain positive in the medium-term if the Fed plans to increase interest rates in 2022 which will positively impact the banking sector.
