US banks: whatever the entry barriers, incumbents face asymmetric profit scrutiny

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Depending on which opinionated chief executive you listened to this week, Wall Street banking is either a business with high barriers to entry or it is not.

On Thursday, James Gorman was exultant after another blowout quarter for Morgan Stanley’s investment banking business. Revenue jumped 67 per cent. In his comments to analysts, he declared “it didn’t work out so well” for regional and foreign players who tried to get into institutional securities.

Yet just one day earlier, Jamie Dimon said that JPMorgan would “spend whatever we have to spend to compete with all the folks in our space”. 

Part of the difference in their viewpoints is explained by their differing exposures to corporate and consumer lending. JPMorgan, with its business of credit cards and home mortgages, is competing against upstarts with slick smartphone apps. But big ticket M&A deals are not so easily replicated by tech disrupters.

But however you look at it, record profits show that the US banking business remains healthy.

Tepid and even negative loan balance growth has surprised investors given the strong economy — though loan loss expense and reserve releases have been counterweights. Bank of America has taken the approach of investing slightly more aggressively. One executive noted that the bank had higher deployments in Treasuries and mortgage-backed securities than loans. While BofA’s revenue growth was above 10 per cent, its rivals were essentially flat.

Expenses are drifting up. Investment banker pay is rising as managers pay out to keep stars from defecting.

The worry in 2022 is that costs will remain high while record-breaking fees recede. Consumer banks will still be forced to invest in technology to keep the likes of PayPal and Square at bay.

Meanwhile, investment banks will be stuck with pay guarantees to rainmakers caught in a dry spell. Challengers must simply demonstrate market share growth. The challenge that strong incumbents always face, no matter the risk from upstarts, is pressure to keep profits high.

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