COVID-19 Boosts for US Investment Banks

Overall, 2020 was a difficult year for most industries; tourism, hospitality and entertainment rank amongst the worst-hit. However, some of America’s largest investment banks have managed to prosper where others have struggled. As the banks release their 2020 Q4 earnings, it has been revealed how, not only have the largest Wall Street banks survived the pandemic, they have excelled in some areas.


A significant component of Q4 success of these banks stems from the growth in stock trading observed as of late. Goldman Sachs, Bank of America, Citigroup, Morgan Stanley and J.P. Morgan all reported equities trading revenue that beat analysts’ (surveyed by financial data provider FactSet) expectations by more than 10%. This boom in stock trading volumes coincided with the increasing importance of the retail market with individual investors possessing increasingly easy access to stock markets through applications such as Robinhood. As a result of the increased volume of retail investors, associated trading fees have served to bolster banks’ financial statements.


Figure 1: Graph showing YoY Q4 results for America’s largest banks. Bloomberg.


However, the increase in banks’ net income has not been solely driven by their trading activities. As indicated in Figure 1, excluding Citigroup, the remaining large US investment banks have observed their investment banking revenues increase YoY compared to Q4 2019. Investment banking divisions on Wall Street have been able to capitalise on the stress that other industries are facing through offering restructuring services, as well as debt and equity issuances – and claim large fees accordingly.


This has resulted in the 5 of the 6 largest US banks increasing in size and strength during the pandemic (the sixth, Wells Fargo, has been prohibited from growing by the Federal Reserve). The 5 banks had a collective 10.7 trillion USD in assets at the end of 2020, an increase of 20% YoY, whilst a combined 79 billion USD in net income fell from 100 billion USD in 2019. Drawing clear conclusions from the results is difficult; pure investment banks, such as Goldman Sachs and Morgan Stanley, appear to have outperformed those that also offer retail services. For example, Morgan Stanley recorded record profits with analysts and the financial media calling 2020 their best year ever. This is complicated, however, by J.P. Morgan’s stellar 2020 performance despite the effect COVID-19 has had on their retail banking arm. Trading profits and their investment banking division largely covered for the mortgage and consumer loan defaults that nationwide lockdowns have caused.


In addition to a generally strong 2020, US investment banks are facing increased regulatory scrutiny. The expected incoming chair of the Senate Banking Committee, Senator Sherrod Brown, stated that America’s biggest banks “have a lot of power” and that “we need to know more about how they do their business”. This likely indicates that Washington will increase oversight of Wall Street and also potentially signalling tougher regulations in 2021. Furthermore, on the President’s first day in office, Joe Biden appointed a new Chief of the Securities and Exchange Commission, Allison Herren Lee. As a vocal proponent of climate-related issues, she is expected to take a tougher stance on ESG factors and banks’ commitments to them.


With Goldman Sachs executives warning that their sales and trading success is unlikely to continue in 2021, 2020 may stand out as an anomaly for investment banks. COVID-19, an eventful US election and widespread boredom for large numbers of Americans have all been cited as factors that have contributed the high trading volumes observed. Whilst COVID-19 is likely to remain a factor for at least the near-future, widespread vaccine deployment may signal a return to normality, potentially offsetting trading revenues with traditional investment banking services. Reduced uncertainty is likely to boost M&A and IPO volumes, which often entail large fees. Goldman Sachs’ and Morgan Stanley’s secured management positions for British fin-tech start-up TransferWise’s 2021 IPO, estimated 5 billion USD valuation, offers a prime example. As such, the modern, diversified models employed by the largest US investment banks looks set to remain resilient in the short- to mid-term.


By Andrew Hopkins

Sector Head: James Float

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