Conclusive evidence on whether tax cuts will ginger up the whole economy will take longer to appear, although some bankers detect it already. Even so, the strong showing indicated more than merely a stroke of the presidential pen. JPMorgan Chase, America’s biggest bank, would have claimed a record profit even without lower taxes. Higher interest rates pushed its net interest income (the gap between lending revenues and borrowing costs) up by $1.1bn, or 9%. As the Federal Reserve raises rates further, banks can expect more of that. Perky loan growth helped, too.
In investment banking, the brightest spot was in buying and selling shares. Choppier markets meant livelier trading after a quiet 2017. Revenues leapt by 38%, year on year, at Bank of America, Citigroup and Goldman Sachs and 25%-plus at JPMorgan Chase and Morgan Stanley. Trading of bonds, currencies and commodities was flatter—except at Goldman, where business rebounded by 23% after a poor start to last year. Revenues from advice and from underwriting new bond and share issues were mixed.
All this leaves America’s largest banks in rude health—the rudest, arguably, since the financial crisis a decade ago. The unweighted average return on equity for the biggest six in the first quarter was 13.1%. According to data from Bloomberg, it is at its highest since the crisis. Only Citigroup, at 9.7%, was below the 10% mark that investors regard as par. Bank of America cleared that hurdle for the first time in six and a half years. Goldman’s 15.4% was its best for five. Morgan Stanley’s 14.9% easily beat its self-effacing target.
Moreover, those returns are built on a much thicker equity base. The average ratio of common equity to risk-weighted assets, a key regulatory gauge of banks’ strength, is 12.5%, more than three times as high as at the end of 2007 (using an estimate by Autonomous Research). Lately, in fact, the ratio has declined slightly, as banks have returned money to shareholders and the Federal Reserve has felt confident enough to let them. Last June the Fed approved the big six’s plans to spend $72bn buying back shares over the next year, as well as increasing dividends.