Wall Road bosses see the windfall persistently, which boosts pay and recruitment

(Bloomberg) – The business and trade profits that the pandemic sparked on Wall Street firms continue to pile up as the economy recovers – and U.S. banking leaders are pointing to signs that it is far from over.

A new round of earnings reports from five of the nation's largest lenders included income from investment banking at Morgan Stanley and Bank of America Corp. at or near record levels and dramatic spikes in stock trading across the industry, such as a surprising 40% jump in Citigroup Inc. Watching closely Goldman Sachs Group Inc. reported its third quarter results on Friday.

The final stage of the 18-month frenzy was fueled by companies eager to close deals as they adjust their businesses and by traders betting the pace of an economic recovery in the face of supply chain problems and concerns about inflation. The prospect, according to several leading financial firms, is more like this, along with mounting pressure on the Federal Reserve to reduce its pandemic emergency aid to the economy.

"Investment banking pipelines remain healthy in all sectors and regions and activity is expected to continue given the current momentum," Morgan Stanley chief financial officer Sharon Yeshaya told analysts Thursday. Chief Executive Officer James Gorman predicted that the Fed's tapering will fuel market volatility into the next year.

The Wall Street business bonanza is a source of relief for banks struggling to earn more from traditional lending that has suffered from sluggish demand and persistently low interest rates. JPMorgan Chase & Co., the largest U.S. bank, said consumer credit was down 2% year over year, while commercial credit was down 5%. Wells Fargo & Co. declined 15% and 7%, respectively.

The surge in deals and other revenue gains will likely translate into higher compensation costs for JPMorgan in the coming year as the company rewards employee performance, the bank told analysts on Wednesday. Rivals, including Citigroup, mentioned efforts to fill their desks with new hires. Bank of America said the battle for talent will also increase its compensation costs.

Wall Street's top firms began to capitalize on a golden era for dealmaking and trading after the pandemic outbreak last year. When the economy collapsed, companies rushed to raise funds, boosting underwriting and bond trading amid stock price fluctuations. While fixed income trading has cooled since then, customer interest in stock markets has supported equity market revenues and supported a record spate of corporate deals.

Bank of America's investment bankers ended the third quarter with a “very strong” pipeline of deals that “bode well for the fourth quarter and beyond,” CFO Paul Donofrio told reporters Thursday.

That reflected the mood of his colleague at JPMorgan, Jeremy Barnum, the day before.

"Looking ahead to the fourth quarter, the overall pipeline is healthy and the M&A market is expected to remain active," Barnum told analysts. He predicted that in the final months of the year, investment banking fees will rise from late 2020 onwards, even if they fall from the strong third quarter.

Citigroup has enrolled 200 bankers in its corporate and investment banking branches worldwide, including its technology, healthcare and financial technology practices, CEO Jane Fraser said on a conference call Thursday.

"The recovery from the pandemic certainly continues to build confidence from businesses and consumers," she said. "I particularly like the robust pipelines that we see for the rest of the year and beyond."

–With support from Katherine Doherty, Jenny Surane, Hannah Levitt, and Sridhar Natarajan.

© 2021 Bloomberg L.P.

Related Articles