Bank profits soar in 2021, but inflation is on top of mind

Three of the country’s largest banks reported huge profits for 2021 on Friday, helped by an improving economy, consumers and businesses willing to spend and borrow.

NEW YORK – Three of the nation’s largest banks on Friday reported huge profits for 2021, helped by an improving economy and consumers and businesses willing to spend and borrow.

But inflation is sweeping through the outlook for 2022, based on bank managers’ comments to reporters and industry analysts. They expect inflation to rise this year and face higher compensation costs as banks compete for talent and staff. Wall Street could hear similar comments in the next few weeks as the rest of the US companies release their results and share their forecasts for the next year.

“We spent a significant amount of 2021 talking about inflation and I think we will spend more time in 2022 talking about it,” Mark Mason, Citigroup’s chief financial officer, said on a call Friday with reporters.

While JPMorgan reported a 14% drop in fourth-quarter profit, the bank still generated nearly $50 billion in profit for the full year of 2021, up significantly from $36.4 billion in profit in 2019, before the pandemic.

Citi brought in $21.95 billion last year. This goes beyond what Citigroup achieved in 2006, when the bank earned $21.2 billion at the height of the mortgage bubble and when Citigroup was a much larger financial conglomerate than it is today.

Wells Fargo’s full-year profit was $21.55 billion, just below previous records but better in terms of multiples of the previous year. Wells’ operations remain restricted by the Federal Reserve, which has prevented the bank from getting any bigger after sales practices problems and other scandals.

Both JPMorgan and Citi reported higher expenses last quarter, much more than analysts had expected. Both banks said that was partly due to the need to hire new employees and pay the higher wages they are now asking for.

“Labour markets are tight, there’s a bit of labor inflation, and it’s important for us to attract and retain top talent and pay competitively,” Jeremy Barnum, JPMorgan’s chief financial officer, said on a call with reporters. Barnum said he expects the bank to face “headwinds” this year, including higher wages, which could affect its profitability.

Wells managed to keep expenses relatively manageable in the fourth quarter, but it also expects wage inflation to hit this year.

“We expect approximately $500 million in wage and benefit-related inflationary increases in 2022 beyond the normal level of merit and wage increases,” Mike Santomasimo, the bank’s chief financial officer, told investors.

The only positive thing for banks, if inflation continues, is higher interest rates. The Fed has already sent a cable to investors that the central bank is considering at least three interest rate increases this year to keep inflation in check. Higher interest rates mean that banks can charge borrowers more fees for loans.

What bankers worry about is that inflation may get out of control and the Fed will have to act more aggressively to tame it.

“The biggest concern is whether this inflation will turn into a wage-price spiral,” Mason told reporters, referring to the economic phenomenon where employees demand higher wages to cover rising living costs, which is leading companies to raise item prices to cover higher costs. wages. It can lead to years of high inflation, the most prominent example of which is the rampant inflation of the 1970s.

On a call with investors, JPMorgan CEO Jamie Dimon said it could take “six or seven” interest rate hikes this year to control inflation.

“This whole idea that somehow he’s going to be nice and kind and never to be surprised (is) wrong,” Damon said.

Investors will get quarterly results from Bank of America, Goldman Sachs and Morgan Stanley next week. There will be a lot of interest in investment banks – Goldman and Morgan – because both banks usually have some of the highest compensation costs in the industry.

Bloomberg News reported Friday that Goldman plans to pay one-time bonuses to its highest-paid employees in order to keep them at the company.

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