In dollar terms the biggest Wall Street banks are enjoying themselves more than at any time since 2007. After years of struggle, pre-crisis levels of profits are back.
JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanleymade a combined $17.6bn in second-quarter net income when they reported in the past 10 days. That is the best since the same period six years ago. The new-found earnings strength has not gone unnoticed in Washington where Sherrod Brown, a Democratic senator, suggested to Ben Bernanke, chairman of the Federal Reserve, that he should not heed bankers’ pleas to rein back regulatory pressure. “It’s no surprise that mega banks are doing quite well,” he says. Investors have gravitated to a sector that not long ago used to struggle to attract interest as stormclouds from toxic assets to new regulations left banks unloved. Shares in BofA and Morgan Stanley have more than doubled in 12 months. Yet these are not the same banks that entered the crisis. JPMorgan swallowed Bear Stearns and Washington Mutual, BofA bought Merrill Lynch and, even for those untransformed by mergers, there has been a monumental restructuring. They have spent tens of billions of dollars on acquisitions, legal settlements and writedowns to return to those profit levels. And even if the headline numbers for the survivors look attractive, they are still far from pre-crisis levels of profitability. “You’ve seen this big rock – the regulatory change – splashing into the mill pond,” says Brad Hintz, analyst at AllianceBernstein. “The thing it hits immediately is all the RoEs of the banks.”
The average return on equity at the five big Wall Street institutions is 8.9 per cent, less than half the returns reached in 2006 and 2007, partly because regulators have demanded far higher capital levels to absorb future losses. But it is getting better.