Wall Street’s big banks roar again while cutting costs

Marc Sidwell
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the most committed banker-basher should find something to like in the latest results from Wall Street. Huge rises in profits at JP Morgan and Goldman Sachs from a year ago came alongside reductions in staff and salaries and a boost in lending to small businesses and homebuyers.

JP Morgan announced it was cutting chief executive Jamie Dimon’s compensation in half compared to the year before, from $23m (£14.3m) to $11.5m, in the wake of the so-called London Whale trading fiasco, which lost the firm $6bn. Meanwhile Goldman Sachs reported that by the end of 2012 it had decreased its total staff by three per cent year-on-year and that 2012’s non-compensation expenses were down four per cent on 2011.

While compensation and benefits were up six per cent year-on-year at Goldman Sachs in 2012, it got more bang for its buck. Their ratio to net revenues fell from 42.4 per cent all the way to 37.9 per cent – the second-lowest level since going public, and the lowest ratio since 2009. The bank’s average ratio has been north of 44 per cent. Also, in contrast with recent headlines about its now-shelved plans for the tax-efficient payment of some bonuses in the UK, Goldman Sachs’s effective tax rate in 2012 was up on 2011, from 28 per cent to 33.3 per cent.

JP Morgan announced $20bn in loans to small US businesses, up 18 per cent. Its mortgage business also did well, defying the post-crisis slump: mortgage banking recorded originations of $51.2bn, up 33 per cent, and the bank originated more than 920,000 consumer mortgages.

All this alongside showstopping year-on-year increases in profits. Profit in the fourth quarter of 2012 was up $2bn or 53 per cent at JP Morgan year-on-year to $5.7bn. Goldman Sachs made $2.89bn profit in the last quarter of 2012, up from $1.01bn a year before, a colossal 186 per cent increase. BNY Mellon, also reporting, did provide a note of caution, but even here profit in the fourth quarter was up by 23 per cent.

Those who think Washington and Wall Street are too cosy could to some extent see these figures as a reflection of that relationship. Quantitative easing by the Federal Reserve has helped stock prices and so boosted banks’ management fees and portfolios. Goldman Sachs, for instance, saw net revenues from its own investments in equities for the last quarter of 2012 reach $789m (excluding its holding in the Industrial and Commercial Bank of China) – up 105 per cent year-on-year. The bank made another $2.304bn from client services in relation to equities, up 36 per cent year-on-year.

Yet the achievement was broader than that explanation suggests. Goldman’s net revenue from fixed income, currency and commodities client services was up 50 per cent year-on-year, at $2.038bn. And while growth of its debt underwriting was boosted by the Fed’s artificially-low interest rates driving growth in corporate bonds, this brought in only $593m in the quarter, a relatively small proportion of the overall figure of $9.236bn. Wall Street deserves credit for doing more with less in a still-tough market.