How are banks doing? – The second-quarter results
What is it about?
On Tuesday, JPMorgan Chase reported revenue of $33.8 billion, which beat analysts’ forecast of $30.3 billion. The coronavirus pandemic has caused the bank’s retail banking division to suffer a $176 million loss, which contrasts with a $4.2 billion profit a year ago. The lockdown and suspension of business operations caused significant unemployment in the US and have led to many customers defaulting on their loans. However, the bank’s corporate and investment banking thrived thanks to a surge in fixed-income trading and debt sales by companies seeking cash to survive during the crisis. According to Investopedia, fixed-income trading is the buying and selling of securities such as government and corporate bonds.
Citigroup and Goldman Sachs also showed similar performance in the second quarter. Citigroup’s revenue was $19.77 billion, compared to $19.12 billion forecasts. Just like JPMorgan, although its consumer banking suffered from revenues falling by 10%, strong fixed-income trading raised the company’s Markets and Securities Services revenues by 48%. Goldman Sachs, which has the largest division for Wall Street trading and investment banking, reached a revenue of $13.3 billion, which was $3.5 billion higher than the forecast.
In contrast to the three companies, Wells Fargo, which has a smaller investment bank division, showed weaker performance with revenue of $17.8 billion compared to $18.4 billion forecasts.
The strikingly strong performance of banks can be attributed to the Federal Reserve’s (Fed) policy of buying corporate bonds to stabilise disrupted markets amid prolonged pandemic. Companies on the brink of collapse began to issue bonds and borrowed more than $230 billion over March to May. Banks collect significant fees in underwriting bonds and executing debt issuances, so the boom in debt capital markets hugely benefited the investment bankers.
Flourishing debt capital transactions don’t just benefit banks. They also benefit law firms. Law firms get involved in negotiating and drafting bond agreements setting out the sale price, interest payment, bond maturity and so on. They also have to advise on any regulatory issues to the companies such as whether they are eligible for the criteria set for the Fed to buy corporate bonds. For example, in June, Fed gave a generous reading of the Coronavirus Aid, Relief, and Economic Security Act to allow itself to buy all kinds of bonds, including non-financial corporate debts under five years. Law firms would need to keep abreast of any developments in the law as abrupt changes in law became common to meet the emergency needs during this pandemic.