Aside from the recent turmoil in the financial markets, many large corporations have released the 2021 fourth quarter (Q4) earnings. They have also released their entire 2021 earnings figures which detail their revenues and costs in that particular quarter.
Bulge Bracket Banks
For large bulge bracket banks such as Goldman Sachs, these financial statements outline the sources of their revenues. Most importantly what these outline are which divisions have generated which profits. Examples of divisions are sales and trading (S&T) and mergers and acquisitions (M&A). These are two of the largest divisions within large investment banks and generate significant cash flows.
These Q4 earnings announcements are important to stakeholders of these banks. They provide a snapshot of how the banks have navigated economic conditions. They also show how their success compares to their peers and how their financial position has changed since the last set of earnings.
Stakeholders, such as clients, employees, auditors and the government, will use these earnings details to then guide their economic and investing decisions. Thus, Q4 earnings clearly play a significant role.
The Figures and Earnings
Below are 2021 earnings for key banks and how they are split between different divisions. These are not 2021 Q4 earnings but instead earnings figures for the whole of 2021):
The Wall Street giants JP Morgan, Goldman Sachs and Morgan Stanley posted the greatest absolute earnings. In addition to this, they posted the greatest YoY growth rates in their fees. The European bulge brackets such as Credit Suisse, Deutsche and Barclays experienced positive albeit lower growth in their earnings.
M&A and Equity Earnings
M&A and equity fees clearly dominate the earnings figures of many of these bulge brackets. However, what is more interesting is the sources of these earnings which are decomposed at an industry level below:
As is evident by quarterly trends, M&A fees have grown over the past year and, despite a tail-off later in 2021 Q4, they largely held the balance sheets of banks in mid to late 2021. This is particularly prominent in Q3 – the quarter when the pandemic was taking its toll on the equity and credit markets. This is shown by the squashed yellow and teal coloured bars.
Many analysts have discussed the significance of the sharp spike in M&A activity since the pandemic began. Sectors such as tech and healthcare were at the forefront of this boom in corporate takeovers and mergers.
Another interesting discussion point is the bonuses paid by these banks. Once again, the American giants are set to pay bumper bonuses to their M&A bankers following the aforementioned M&A boom. These companies are also increasing the bonus pool by around 50% compared to 2020.
This comes after many bulge brackets have increased their base pay and compensation packages. This changed followed complaints from analysts about stress levels and being overworked. Many firms have changed the nature of their compensation packages to be more cash-based rather than stock-based, attempting to bid to persuade bankers to stay rather than move to another firm.
Credit Suisse, for example, has increased the cash component of its bonuses. Credit Suisse also introduced a new innovative policy after a number of senior bankers left for the American mid-market; if bankers leave within 12 months of the cash bonuses being awarded, they will be required to repay the bonus.
The Swiss investment bank is already expected to be paying out poor bonuses this year. It cites “events” that have negatively affected its financial position, one of which was the Archegos scandal in March 2021.
The Implications of Bonuses
So what are the implications of bulge brackets bonus and earnings announcements? They have significant effects on the stock markets largely via their influence on investor sentiments.
Many large institutional investors are clients of these banks. These clients form a significant share of the financial markets. These banks posting significant YoY growth in earnings is a sign of confidence. If banks are confident in their economic and financial outlook this is likely to spill over to investors. This, in turn, will make them more confident.
Nevertheless, there are many other drivers of investor confidence and the markets in general. This has been on display particularly over the recent week with the huge swings in stock market indices. An example is the announcement of future interest rate rises by the Fed; this sent shockwaves through the market though, surprisingly, the indexes did recover somewhat on Friday.
Banks have experienced a great amount of growth not only their 2021 earnings on 2020 but also in their bonuses – both of which, see American banks leading the way. However, coupled with growing inflation expectations and supply chain constraints, current market and investor sentiment are a cause for concern for both banks and the wider economy.
Appetites for organic (internal) versus inorganic growth via M&A may have changed. Whether this is a temporary or systematic change is yet to be seen. This will affect how major bulge brackets go about their operations and strategies in the future.