Weekly Brief: This Pandemic Is The Gift That Keeps On Giving For Banks

Weekly Brief: This Pandemic Is The Gift That Keeps On Giving For Banks

over 2 years ago3 mins

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The pandemic is the gift that keeps on giving for America’s investment banks, as share sales, mergers and acquisitions (M&A), and reserve cash all help take them to record highs.

🕰 Recap

  • Cheap money, sky-high stock prices, and animal spirits are all set to make 2021 a record-breaking year for mergers and acquisitions
  • That helped push dealmaking revenue at JPMorgan – America’s biggest investment bank – to a record high last quarter
  • But it’s not just JPMorgan: Bank of America and Morgan Stanley reported record M&A revenue last quarter too

✍️ Connecting The Dots

The start of the pandemic was a nerve-wracking time for most firms, but investment banks took it in their stride. Companies were, after all, issuing plenty of bonds and shares as they rushed to raise cash amid the global economic downturn, and banks’ underwriting businesses took a fee from every sale they worked on.

And now that the economy is back on its feet, corporations have been putting all that cash to work by buying other companies. In fact, 2021’s on track to be a record-breaking year for M&A, with one consultancy expecting worldwide deal-making activities to hit $6 trillion by the end of the year. And since banks take a handsome fee from every deal they advise on, that helped deliver record M&A revenue last quarter for JPMorgan Chase, Bank of America (BoA), and Morgan Stanley.

It doesn’t stop there. Banks had previously set aside cash reserves during the pandemic in case borrowers didn’t pay off their loans, but they’re now at a point where they feel relaxed enough to put that cash back into the business. The release of these reserves added almost $6 billion to the bottom lines of BoA, JPMorgan, Citigroup, and Wells Fargo last quarter.

🥡 Takeaways

1. Investors want banks to rely on traditional revenue streams.

Trouble is, analysts aren’t sure banks have much more of that pandemic cash left tucked away, and M&A – which is, by nature, pretty cyclical – won’t keep booming forever either. Understandable, then, that investors want to see banks start relying on more traditional revenue streams, like interest income from loans. That’s easier said than done, mind you: consumers and businesses – bolstered by the massive government stimulus programs of the last 18 months – aren’t borrowing so much. Still, those government programs are petering out now, so banks are confident demand for loans will pick up again.

2. Bank stocks can hedge your portfolio against rising interest rates.

There are two main drivers of a bank’s interest income: demand for loans and the interest rate charged on those loans. The latter’s determined by the general level of interest rates in the economy, as dictated by the US Federal Reserve (the Fed). So it’s no surprise that ultra-low interest rates over the past year and a half have hobbled banks’ interest income. But that could be about to change, with the Fed increasingly expected to raise interest rates starting next year. That should benefit banks’ bottom lines and, in turn, their stock prices. So if you’re heavily invested in growth stocks that’ll see their valuations take a hit once interest rates rise, you might want to consider adding some bank stocks to your portfolio as a hedge.

🎯 Also On Our Radar

Space tourism company Virgin Galactic is delaying the start of commercial flights until the fourth quarter of 2022, after announcing late on Thursday that it would be reorganizing its development and test flight schedule. Delayed flights mean elusive profits are also further down the road, and investors duly brought the firm’s shares back down from the stratosphere: their price fell as much as 20% on Friday.

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