Many of the largest US and European banks have reported impressive profits in the final quarter of 2020, despite the economic impact of the global health crisis. But does this mean 2021 will be the year of pain?

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Despite the uncertain operating environment due to the Covid-19 pandemic, several big US and European banks exceeded profits expectations in the fourth quarter of 2020, with some recording double-digit percent increases in net income. Notably, Deutsche Bank has returned to profit after a number of years in the red.

The US giants led off the earnings season in mid-January, with Citi reporting a 47% quarter-on-quarter boost in net income across the group, while JPMorgan Chase (JPMC) and Goldman Sachs saw 29% and 30% jumps, respectively. Bank of America (BofA) experienced a more muted 12% rise over the quarter. Wells Fargo, however, was the outlier of the top five US banks, recording a 1% contraction in net income quarter on quarter and a 17% drop compared to the same quarter in 2019.

JPMC and Goldman Sachs’ impressive results were driven by their strength in investment banking and trading. For example, JPMC’s corporate and investment banking division saw a 34% increase in global banking investment fees over the quarter and 20% rise in markets revenues. Goldman Sachs’ investment banking saw a 33% spike in revenues over the previous quarter.

Across the pond, many of the large European banks have not yet reported fourth quarter results, but those that have illustrate a more mixed environment. As mentioned, Deutsche Bank posted a net profit in 2020 for the first time in six years. Mainly due to a global trading boom, the German bank posted €113m in profits versus a loss of €5.7bn in 2019. BBVA saw a less dramatic turnaround: it posted fourth-quarter profits of €1.32bn, after suffering a loss in the same period in 2019. However, the Spanish lender’s full-year profits were 36% below its 2019 figure.

UBS, on the other hand, recorded a 137% increase in net profit on the fourth quarter of 2019 and a 54% year-on-year increase. Its stellar performance is attributed to the Swiss bank’s wealth management and asset management divisions, as well as a strong performance from the investment banking division.

BNP Paribas and Santander struggled in the fourth quarter. The French bank saw its net profit drop 15.9% compared to the previous quarter. Year-on-year profits were also down, by 13.5%, but above management expectations at the beginning of the pandemic. For the first time, the Spanish bank posted an annual loss, of €8.8bn, mainly as a result of loan provisions and write-downs. Its fourth-quarter net profits fell by 90% year-on-year, to €277m.

During the past year, banks have been very vocal about their social purpose, but how can they be community-centred and help businesses survive while at the same time coming down hard on those that can’t pay back their loans?

After a year of restrictions put in place by the European Central Bank and the US Federal Reserve, many banks have announced dividends and share buybacks schemes. For example, BofA announced its plan to buy back $2.9bn in shares in the first quarter, while BBVA is repurchasing 10% of its shares, equivalent to €2.6bn, and has committed to pay 35-40% of its profits in dividends. UBS said it would restart share buybacks in the first quarter of this year and announced a new three-year share repurchase programme of up to CHF4bn ($4.5bn).

Releasing cash previously set aside for expected loan defaults is another trend in these earnings reports. For example, JPMC reported it released $2.9bn, while Citi freed up $1.5bn. This seems to indicate that many banks feel the worst has passed.

However, despite better-than-expected results, banks will continue to face considerable headwinds in 2021. According to Fitch Ratings, 60% of global bank ratings are still on negative outlook. Slower-than-expected economic recovery due to recurring lockdowns or vaccine deployment setbacks could exacerbate the risks banks face, according to the report.

In addition, the big unknown is what will happen when governments begin to withdraw support for the economy and borrowers. While it’s been a good news story in this set of results, banks must prepare for what they will need to do operationally when the surge of defaults begin. During the past year, banks have been very vocal about their social purpose, but how can they be community-centred and help businesses survive while at the same time coming down hard on those that can’t pay back their loans? Banks will need to think carefully about how to combine efficient digital processes with a human touch.

While banks have ostensibly regained much of the trust they lost during the global financial crisis by their actions throughout the pandemic, this may be a fleeting moment as grumbles around shareholder dividends and CEO remuneration begin anew.

Joy Macknight is managing editor of The Banker. Follow her on Twitter @joymacknight

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