Thu. Jan 20th, 2022

Wall Street’s largest banks will report record gains for 2021 this month thanks to investment bank fees and lower-than-expected loan losses during the pandemic, with analysts warning that it could take years to replicate such excellent earnings.

Citigroup and JPMorgan Chase are the first major banks to announce fourth-quarter results, reporting on January 14th. They will be followed by Goldman Sachs on January 18, and then Morgan Stanley and Bank of America on January 19.

Analysts predict that all but Citi will report their highest ever-year gains, according to estimates compiled by Bloomberg and historical earnings data from S&P Capital IQ.

“You may have to go until 2024 before earnings are higher than they were in 2021,” says Matt O’Connor, head of large-cap banking research at Deutsche Bank.

Line graph of net income in $ billion showing major US banks making record profits in 2021

Nevertheless, the prospect of interest rate hikes by the Federal Reserve in 2022 feeds optimism that banks may be ready for another strong year.

“We expect bank shares to continue to outperform the market in 2022,” Jason Goldberg, an analyst at Barclays, wrote in a note to clients this week.

Earnings in 2021 were flattered by the release of reserves that banks set aside to cover potential losses from loans they feared would weaken due to the pandemic.

Losses have so far been much less common than feared. Goldman analysts estimate the seven major banks it covers, which include 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 huge investment bank fees, with global mergers and acquisitions in 2021 hit their highest levels since records.

“People do not believe that these types of levels experienced in 2021 are necessarily normal, especially the fee-based capital market firms,” ​​said Devin Ryan, an analyst at JMP Securities.

Banks have so far used profits to invest technology, pay bonuses and buy back their own stock.

After such a big year, investors question whether 2021 represented “peak earnings” for major banks, according to Richard Ramsden, banking analyst at Goldman Sachs.

“What investors are trying to figure out is, has the market priced the rate option embedded in bank shares too high or underpriced?” Ramsden said.

At the moment, the market is praising another good year for banks. US bank shares rose 35 percent in 2021, according to Deutsche Bank analysts, better than the S&P 500, and rose again in the first few days of 2022.

Line chart of% gains showing that Bank shares outperformed the broader market in 2021

Investors bet that rising interest rates will revive the earnings that banks make from loans. Demand for loans, which was sluggish in 2021 amid record amounts of government stimulus, also showed signs of improvement, recent Fed data showed.

Analysts predict that a larger share of earnings from loans instead of releasing loan loss reserves will gain a better valuation for bank shares from the market, even if total earnings for the year come in lower.

“It’s a fair point that 2022 is kind of a transition year where underlying earnings are likely to improve, but reported earnings are declining,” O’Connor said.

More demand for loans in a higher rate environment will also enable banks to get more out of the large base of deposits that swelled during the pandemic. At JPMorgan, the largest U.S. bank by assets, deposits rose more than 50 percent to $ 2.4tn from late 2019 to September 2021.

“When rates start to rise,” says Keith Horowitz, US banking analyst at Citigroup, “that’s when you really start to see the real benefit of these deposits.”

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