The Home of Investment Banking

Banking Profits: Who Performed Best in 2020?

Image: Gideon Benari

Every quarter, publicly-traded companies in the USA must, by law, release their financial earnings, allowing investors to assess the company’s financial position. Some of the biggest investment banks globally have recently released their results for the fourth quarter of 2020, satiating curiosities and putting an end to speculation.

Overall, the fourth quarter of 2020 saw strong performances to cap off a year of uncertainty. IB Insider examines and explains some trends you may notice across financial earning reports.

Market Volatility Helped Some but Harmed Others

According to S&P Global, macro-heavy banks that booked FICC revenue growth of 50% to 70% in the first three quarters of 2020 were helped by volatility bouts in flow rates and foreign exchange.

The global markets have far from settled down, with J.P. Morgan Global Research forecasting “volatile but strong global growth as economies reopen” going into 2021. Market volatility has not had the same impact on all investment banks, and clearly some were more poised to benefit than others.

The winners in this group include Morgan Stanley, which attributes the increase in their Fixed Income sales and trading net revenues towards strong client engagement and market volatility, with notable strength in foreign exchange and credit products.

Similarly, JPMorgan has enjoyed a 15% year-on-year increase in Fixed Income Markets revenue to $4 billion, caused by strong performance in credit, currencies, commodities, and emerging markets.

On the other hand, while Citigroup’s Fixed Income Markets revenues of $3.1 billion were a 7% year-on-year increase, their higher revenues resulted from strong performances in spread products and commodities.

In fact, these gains were partially offset by lower revenues in rates and currencies, showing the need to look beneath the rosy picture of a revenue increase.

Note: totals may not sum due to estimates and the omission of income taxes.  

The Action is in Markets

Markets is the division in which investment banks buy, sell and clear client transactions on major stock, options and futures exchanges worldwide. The fourth quarter of 2020 saw impressive gains in this area, with JPMorgan in particular seeing an 18% year-on-year increase in Markets and Securities Services revenue to $7.2 billion.

Citigroup saw revenues in the same division increasing 13% year-on-year to $4.5 billion, and Goldman Sachs came close with net revenues in Global Markets increasing 23% year-on-year to $4.27 billion.

Equities played a big part in this trend, recording some of the highest growth rates compared to its companions in Markets. For example, Goldman Sachs’ 2020 Q4 net revenue in Equities made up more than half of its total revenue for Global Markets and recorded a 40% year-on-year increase, while its companion FICC saw a mere 6% year-on-year increase in net revenue.

JPMorgan saw its Equity Markets revenue increase by 32% year-on-year, Citigroup 57% year-on-year, and Morgan Stanley 30% year-on-year.

Behind these significant year-on-year increases lay the mutually reinforcing factors created by the coronavirus pandemic. Firstly, the economic downturn led the US Federal Reserve to respond by slashing interest rates to zero and snapping up government debt, pushing Treasury yields to historic lows.

This turns money market funds, bonds and other fixed-income instruments into low-returning investments. As a result, investors were looking to alternative sources for getting some sort of return on their money.

Secondly, with many cash-strapped companies facing zero revenue environments, there was an urgent need to raise capital. The trend of stocks going up even as the economy flounders seemed to have inspired confidence, with many companies choosing to issue large amounts of new stock and corporate bonds rather than turning to bank loans to pay their debts.

Indeed, Citigroup saw corporate lending revenues fall by 25% year-on-year, and JPMorgan by 23% year-on-year.

Therefore, the high demand was matched by high supply, with JPMorgan, Goldman Sachs, Morgan Stanley and Citigroup all attributing the increase in Equity Markets revenue to “strong client activity in derivatives and Cash Equities”. One notable trend within the market was the surging demand for IPOs, with the trading debuts of more companies during 2020 than in any of the previous five years.

Going into Q1 of 2021, we will likely see equally high levels of stock market activity, with the GameStop saga showing that there is potential for growth even beyond the bounds of rationality.

Moving Forwards

With 2021 hopefully heralding a return to economic growth, investment banks are likely to continue bringing strong performances. It will be interesting to see how the trends created by the pandemic, such as a pivot towards technology, will evolve as global conditions remain as fluid as ever.

More Articles