Investment Bankers’ Takeaway From Earnings: Paycheck Will Shrink

(Bloomberg) — The underwriting and merger slump is spelling bad news for bankers’ pay.

Goldman Sachs Group Inc. and the investment-banking and trading operations at JPMorgan Chase & Co. and Morgan Stanley set aside $4.8 billion less for compensation in the first six months of 2022 compared with a year earlier, a sign that plummeting investment-banking fees will translate into smaller paychecks by the end of the year. Goldman went even further, vowing to slow hiring and reinstate the annual reviews it uses to fire its worst performers.

“We are closely re-examining all of our forward spending and investment plans,” Goldman Chief Financial Officer Denis Coleman said Monday on a conference call with analysts. The New York-based company will be “much more disciplined and focused on utilization efficiency of our human capital resources given the overall environment.”

Wall Street’s biggest banks have been bulking up their ranks to deal with the onslaught of business spurred by the pandemic. Now, inflation and concern about a looming recession are tempering the outlook for merger and underwriting businesses, and many banks are weighing job cuts and lower pay to bolster profits.

Other key takeaways from second-quarter earnings:

Trading 

The biggest U.S. banks pulled in $29 billion in trading revenue, a 21% increase that exceeded analysts’ estimates of $27.9 billion. Leading the pack was JPMorgan Chase & Co., which reported a $7.8 billion haul from the business. 

“In fixed income, elevated volatility drove both increased client flows and robust trading results in the macro franchise, most notably in currencies and emerging markets,” JPMorgan CFO Jeremy Barnum said on a call with analysts. 

Desks focused on rates and currencies were the standouts of the quarter, with overall fixed-income trading bringing in a combined $17.2 billion in revenue as banks profited off wild market swings resulting from recession fears, soaring inflation and Russia’s invasion of Ukraine. That increase, combined with tens of billions pulled in from net interest income, helped the companies weather the investment-banking slump. 

Net Interest Income

The Federal Reserve’s interest-rate increases have made banks’ core lending businesses more profitable. Net interest income — revenue from interest-bearing assets minus what’s paid to depositors — soared past analysts’ estimates at Morgan Stanley, Bank of America and JPMorgan, and is expected to grow further in the second half. NII at Bank of America will probably climb $900 million to $1 billion this quarter, CFO Alastair Borthwick said on a conference call with analysts.

“Higher loan balances and higher rates are definitely helping us have a better result,” Wells Fargo CFO Mike Santomassimo said on a conference call with reporters Friday.

Fines and Fees

Expenses were higher across Wall Street, with more banks disclosing regulatory fines that dented profits. Morgan Stanley was the first to acknowledge a $200 million cost related to a sweeping US probe into the use of unapproved personal devices. That follows the fine imposed on JPMorgan, which late last year said it would pay $200 million. Bank of America said its regulatory expenses also included a cost tied to the unauthorized use of personal phones. And Citigroup Inc. said it took a one-time reserve for the probe, which was “appropriate” and “aligned” with peers, CFO Mark Mason said.

All told, regulators are poised to extract about $1 billion from the five biggest US investment banks for failing to monitor employees using unauthorized messaging apps, Bloomberg reported last week. Though the probe hasn’t been resolved, many of the banks have already set aside the cost as discussions with regulators continue. 

“We obviously anticipate settling that — hopefully soon,” Borthwick at Bank of America said.

Share Buybacks 

Share repurchases were put on the back burner for now at Citigroup and JPMorgan as the banks look to bolster their capital reserves to deal with a coming increase in their required common equity tier 1 capital ratio. 

“We are prioritizing our dividend and are pausing our share repurchases as we build capital,” Citigroup Chief Executive Officer Jane Fraser said Friday. “We know how important buybacks are to shareholder value creation, in particular when we are trading at these levels, and are committed to restarting them as soon as it is prudent to do so.”

Bank of America’s Borthwick said the bank won’t be pausing share buybacks and is “confident” it can meet higher capital requirements it will face in the coming quarters. Goldman’s Coleman said on an earnings call with analysts that the bank is “actively evaluating share repurchases.”

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