Bank results up

Surge in profits driven by pandemic rebound and M&A bonanza unlikely to last, say analysts.

The release of third quarter results by leading US and UK banks over the past few weeks have often confounded market expectations.

In the US, Goldman Sachs reported a 66% surge in third quarter pre-tax profits to $5.2bn over the same period last year, Bank of America was up 58% to $7.7bn, Citigroup’s profits jumped 48% to $4.6bn, while JPMorgan Chase reported a 24% rise to $11.7bn.

In the UK, NatWest's profits tripled in the third quarter to £1.1bn, Lloyds reported a 96% rise to £2bn, Barclay’s profits doubled to £2bn, and HSBC’s earnings jumped 76% to $5.4bn.

“Driving the strong results is the global economic rebound from the pandemic,” says Olivier Panis, an analyst at Moody’s. “Equity markets have soared and there has been a big increase in business volumes.”

“Banks have been operating in a very benign environment,” says Claudia Nelson, a banking analyst at Fitch Ratings. “They have been supported by various government support measures, which has led to widening asset margins, lower funding costs and increased savings volumes.”

The strong third quarter results were because of a number of factors coming together, not a permanent state of events

Claudia Nelson, Fitch

In the US, investment banks have ridden a wave of mergers and acquisition (M&A) activity and initial public offerings (IPOs), allowing groups to cash in on advisory mandates.

Global merger volumes reached all-time highs in the third quarter, surpassing $1tn, according to S&P Global. Moreover, average transaction size was $86.5m year-to-date, an increase of 29% compared with 2020.

The rise in M&A fees pushed Goldman Sachs’ overall financial advisory revenue up 225% to $1.6bn, while underwriting revenue, boosted by the surge in IPOs, jumped 33% to $1.9bn.

“The global trading banks — such as Goldman Sachs, JPMorgan and Citi — have benefited from the strength of capital markets, supporting the investment banking parts of their businesses, such as advisory and M&A,” Ms Nelson says.

Among the UK banks, Barclays is the only one competing with the Wall Street firms on their home turf. Its US business accounts for almost half its income, and the bank’s advisory and equities group posted its strongest ever performance during the first nine months of the year. Barclays’ investment banking income rose to £971m in the third quarter.

Release of provisions

Another factor behind the uptick in profits has been the release of provisions set aside to prepare for a potential rise in loan defaults triggered by the Covid-19 pandemic. “Since the beginning of the year, banks have started releasing some of these provisions as macroeconomic conditions that have improved,” Mr Panis says. “These figures are quite material as some UK banks really ramped up their provisioning reserves last year.”

HSBC has released about $700m in loan loss provisions during the third quarter and Barclays released about £622m, NatWest released £242m and Lloyds £84m, boosting their overall results.

Another factor in the UK has been the booming mortgage market. Lloyds, which owns Halifax and is the UK’s largest mortgage lender, benefited from a rise in demand for larger homes because of the pandemic, as well as the temporary reduction in stamp duty. The bank saw a £2.7bn net increase in home loans during the third quarter.

“Mortgages still account for a high percentage of loans at domestic UK banks, and mortgage margins widened and transactions increased because of the stamp duty relief,” Ms Nelson notes.

Will it continue?

The overall environment for banks’ earnings remains positive “for the time being”, Mr Panis says. “Banks still have accumulated reserves and they have increased their capitalisation. But the very strong post-Covid rebound we have seen this year is probably only temporary and our expectation is that risk and defaults will increase next year.”

Ms Nelson emphasises that underpinning the strong results in the US has been the surge in investment banking fees. “When that starts to normalise, results may start to tail off,” she says.

“The government support measures have also begun to ease, which lead to a few cracks in the credit picture. We do not expect fourth quarter results are going to be as flattered by reserve releases as we have seen in previous quarters this year,” says Ms Nelson. “The strong third quarter results were because of a number of factors coming together, not a permanent state of events — it’s temporary.” 


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