Weekly Brief: As The Stars Align For The World’s Biggest Banks, The Future Looks Very Bright Indeed

Weekly Brief: As The Stars Align For The World’s Biggest Banks, The Future Looks Very Bright Indeed

almost 3 years ago3 mins

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Between an uptick in the global economy and a lot of thirsty traders in the markets, the stars are perfectly aligned for banks to make some serious money.

🕰 Recap

  • There was record trading activity during the first quarter of this year, spurred on by retail favorites like GameStop
  • Special-purpose acquisition companies (SPACs) set records too, with the number of listings in last quarter topping the whole of last year’s total
  • Both factors mean analysts are expecting US financial firms to report the second-most earnings growth of all the country’s sectors this earnings season
  • And things look good so far: Goldman Sachs, JPMorgan, and Wells Fargo posted expectation-busting results on Wednesday

✍️ Connecting The Dots

Banks make money in various ways, but it’s actually pretty rare for all their different segments to do well at the same time. When the economy is improving and markets are moving in a predictable way, for instance, clients are more likely to take out loans, make deals, and stage their stock market debuts. But “predictable” isn’t so good for banks’ trading businesses: it’s when financial markets are wild, volatile, and risky – that is, exactly the kind of market dealmakers and borrowers don’t want – that traders really come out to play.

Last quarter, though, everything seemed to come together for banks. For one thing, there was a sudden surge of Reddit traders that pushed the number of market trades to record highs. Then there was a red-hot initial public offering market – particularly among tech firms and SPACs – that kept banks’ dealmaking businesses on top form. And last but not least, they were feeling confident enough in the economy that they freed up a load of cash – cash they’d previously set aside in case their customers couldn’t pay back their loans.

All that is to say, analysts have gone into this earnings season expecting last quarter’s earnings growth to be one for the record books. In fact, they’ve been backing US banks to grow their profits by the most of all the country’s sectors, with the exception of beleaguered energy companies. And as earnings season kicked off in earnest last week, they’ve so far been proved spot on: industry heavyweights JPMorgan, Wells Fargo, and Goldman Sachs posted blowout results, with the latter’s profit rocketing almost 500% versus a year earlier – its best-ever quarterly update.

🥡 Takeaways

1. Banks like the sound of rising interest rates.

There’s one other situation that could work in banks’ favor. See, their basic lending business model involves borrowing money from central banks at low short-term interest rates, and then lending that money to customers at higher long-term rates. And since the latter are creeping up even as central banks keep short-term rates low, banks should see their profits in that area increase too.

2. Banks may soon have to fight off more competition.

Still, banks could soon be given a run for their money in the lending business: recent rule changes by US regulators have made it easier for non-banks to lend money, which paves the way for tech companies – and even the likes of Walmart – to get involved. The pandemic hasn’t helped on that front, either: a study by McKinsey showed Americans are now more willing than ever to trust fintech for their financial needs.

🎯 Also On Our Radar

Speaking of SPACs, the number of launches of these so-called “blank check” companies has been on the decline lately, as institutional investors become less willing to stump up the cash to support them. Still, let’s not count them out just yet: Grab – the biggest ride-hailing and food delivery firm in Southeast Asia – confirmed it’d be merging with a SPAC last week. And at $40 billion, that deal will be the biggest-ever in the space.

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