American investment banks are in great shape, others are not

American investment banks are in great shape, others are not
American investment banks are in great shape, others are not

American investment banks are in great shape, others are not

Sunday, 18.10.2020

The headquarters of Goldman Sachs, New York. In the third quarter, the establishment almost doubled its net profit while its turnover soared by 30%. (Keystone)

What do the millions of unemployed and corporate bankruptcies matter: while American banks suffered to some extent in the still difficult economic situation in the third quarter, they also benefited from bubbling financial markets.

The period was marked by a real contrast, observe several analysts. On the one hand, traditional banking institutions, which take people’s money on deposit, give them loans or credit cards, “haven’t had a great quarter,” says Dick Bove, sector specialist for Odeon Capital. On the other hand, investment banks like Goldman Sachs or Morgan Stanley, those which operate in the financial markets or provide advice to large companies, “had an unusually good quarter,” he added.

Sign of a certain stabilization of the financial situation of households and companies, the large financial establishments have put much less money aside to cover any unpaid debts of their customers in the coming months than in the second quarter. The first American bank in terms of assets JPMorgan Chase, for example, only provisioned $ 611 million in the third quarter, against 10.5 billion in the previous quarter. But knowing when and to what extent banks will end up facing defaults “remains a big mystery,” said Bove. “Because we don’t know if the government aid really solved the financial problems or just postponed them until next year.”

Unemployment benefits or subsidies to SMEs have notably enabled many individuals to repay their credit card debts more quickly, and many businesses to close emergency credit lines opened by banks in the spring. “We don’t think we’ll see a real increase in defaults until the second half of next year,” said JPMorgan CFO Jennifer Piepszakr. But the recovery remains fragile and the threat of a second massive wave of coronavirus contamination is very real. Several officials have called for additional budget measures.

If a new support plan is not adopted quickly in Washington, where negotiations remain at an impasse for the moment, “we will start to see more pressure with defaults coming at a much, much faster pace. high, ”predicts Citigroup CFO Mark Mason.

Volatility until election

In the meantime, the support measures of the American central bank weigh on bank profits: by keeping interest rates close to zero, the institution makes loans cheaper for individuals and businesses, but also less profitable for financial institutions.

For Bank of America and Wells Fargo, two firms that play a large part in financing the real economy, the revenue generated by their business lending to individuals and SMEs fell by 17% and 19% respectively. “Traditional banks just have to hope that the economy picks up clearly in order to start granting many more loans again”, and thus compensate with volume for the little interest they recover on each operation, remarks Kenneth Leon of CFRA.

The investment banks and the divisions dedicated to brokerage and business advice, for their part, remained in a dazzling form in the third quarter. Goldman Sachs nearly doubled its bottom line as its revenue soared 30%. Morgan Stanley saw its profits jump 26%. Income from stock, bond, currency and commodity brokerage also jumped 30% at JPMorgan Chase and 16% at Citigroup, following the turmoil that marked the markets with the arrival of the pandemic in the United States, they continued to recover in the third quarter. Taking advantage of low interest rates, large companies have become heavily indebted to the markets, via bond issues, while many small companies have taken advantage of the good health of stock market indices to go public. Operations often piloted by large banks, which take a hefty commission in the process. (AWP / AFP)

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