This week, the earnings of Wall Street's largest banks showed that mounting cost pressures are likely to hurt their margins in 2022, diminishing hopes of another solid year for their stocks.
Investors have been selling bank shares as signs have been that the Wall Street financial powerhouses that have pushed earnings to record highs are beginning to cool. (NYSE:) told investors last week that fees and other charges rose in the fourth quarter.
Spending at the largest US lender rose 11% from a year earlier, and the company said it expects it to rise to about $77 billion this year, an increase of 8.6%. Worse-than-expected trading results put pressure on the company's stock, which fell about 6.5% over the past five trading days.
JPM Weekly Chart
Citing inflation and the amount JPMorgan plans to spend on investments, executives told investors the bank is "heading for a few years of sub-target returns."
(NYSE:) said Tuesday it spent an additional $4.4 billion in compensation last year, taking the bank's only quarterly profit decline of the year. (NYSE:) also spent more on compensation in the last quarter of the year, pushing profits down 26%. Full year fees at (NYSE:) were up 18% to $24.6 billion.
Banks increased salaries for junior bankers in Wall Street in 2021, and companies are also paying to retain senior executives. ]
Banking stocks rose sharply last year and this year, amid signs that the Federal Reserve could soon begin raising interest rates — a move that will increase margins on their credit products.
Added to optimistic sentiment about the sector was the expectation that credit growth, which had largely stalled over the past two years, could finally return.
But after the last earnings season, banks appear to be experiencing cost pressures just like high street, and that trend may keep their earnings growth in check.
The major lenders have lost nearly half of their profits this year as investors avoided taking further exposure in one of the hottest segments of the market, where valuations had skyrocketed.
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Future projections
Despite the latest sell-off, we don't think banks will be a dead investment for investors heading into 2022. Loan growth is accelerating both earlier and at a faster pace than analysts initially expected.
Federal Reserve data compiled by Bloomberg shows that loans at the 25 largest banks were 3.5% higher at the end of December than a year earlier. That's a marked improvement from the end of the third quarter, when the same comparison was flat.
Omicron's rapid spread may slow that expansion, but it looks like the economy will pick up after a short pause and infections will fall as fast as they've risen, according to the latest evidence of countries being the first in experiencing the latest wave.
Banks are also in a good position to make easy money when interest rates start to rise without increasing costs. For example, Bank of America (NYSE:) would expect a $6.5 billion benefit in 12-month net interest income from a one percentage point rise in interest rates across the curve, according to a report in the Wall Street Journal.
Bottom Line
Bank's last earnings season was a mixed bag for investors. While rising spending hurt margins at some lenders, higher investment banking income helped others. Overall, the environment remains favorable for lenders, especially as the Federal Reserve is about to raise interest rates and there are signs that businesses and consumers are ready to borrow again.
