US banks should have a lot to be happy about by 2022. Investment banking fees are still driven by furious transactions and IPO activities. The demand for loans, after almost two years of lukewarm to negative growth, shows signs of improvement. Elsewhere, interest rate hikes – the first of which could come as soon as March – will eventually lead to a surge in interest income and margins.
Expectations that the industry is ready for another good year have boosted bank shares. The KBW Bank index has risen 8 percent so far this year, after rising 35 percent in 2021. Shares such as Goldman Sachs, Morgan Stanley, JPMorgan and Bank of America have all reached new highs in recent weeks.
But this dramatic sector rally also leaves room for disappointment. Success in investment banking in particular has meant rising costs and overheads.
For proof, look no further than the beat JPMorgan took on Friday. Investors have wiped out nearly $ 28 billion of the bank’s market value after the company reported sharply higher spending in the fourth quarter and warned of further increases this year.
Similarly, Citigroup’s operating expenses, excluding the impact of asset sales in Asia, increased by 8 percent during the last quarter. Its efficiency ratio – which measures how much it costs to produce a dollar’s income – jumped nearly 12 percentage points to 79.5 percent.
Banks are under pressure to pay to prevent rainmakers from breaching transactions after a record year. A need to invest heavily in technology to keep fintech emerges at bay only contributes to the expense burden.
JPMorgan warned that ballooning costs and moderate Wall Street revenues could mean the bank misses its 17 percent target for return on equity. The bank does have a history of surprises up front. But senior bank executives will no doubt hope that its ordinary vanilla loans, for a change, can drive the group’s profits in 2022.
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