Want to know how the US banks are making so much money?
Want to know how the US banks are making so much money?
JP Morgan reported the highest quarterly profit in history of American banking. Goldman Sachs quarterly profits rose 80% and Morgan Stanley reported a 58% rise in quarterly profits compared with a year earlier.
Here is an explainer:
First, the SpaceX IPO was the largest in history, it also led to the highest amount of fees incurred to list on the stock market. $500 million was paid to 23 banks - Goldman Sachs and Morgan Stanley got $100 million each for their services.
So, is it “one and done” now that SpaceX is now firmly public? No… there is more activity to come through Anthropic, Open AI as well as others in Europe, Asia and the US.
But there’s more to it than that. An IPO is a “liquidity event” whereby existing private investors get paid by new public investors for their shares. Where does that money go? Morgan Stanley said just over half of the extra $148 billion in new assets this quarter came from those who generated money from IPOs. They will earn fees from that subsequent wealth management.
Banks have moved from the traditional “spread earner” to a “fee earner”. This is evident in so many ways.
Last year, everybody was talking about the Mag 7 and the European stock markets. Then the focus moved from tech to AI to memory and semiconductors. As the saying goes, in a gold rush, it’s not those who find gold that make the real money, but those selling shovels. If you think about the second order effects of all the AI investment, the banks who are getting paid to structure the “elevated levels of strategic activity, financing and capital formation” are poised to make a lot of money from those proverbial shovels.
People keep asking how the equity markets keep batting away bad news (and that’s for another post), but banks make money from transactions independent of whether the market moves up or down. The volatility that we’ve been seeing materialises only when people buy and sell. Morgan Stanley’s revenues from equities rose almost 70%.
Further, banking regulation is being scaled back and the banks are reducing their provisions for loan losses; boosting the bottom line in the sector.
Jamie Dimon posed that this might be “as good as it gets”.
So here is what I’m watching out for to determine if we’re at “peak investment bank”?
1. Is the IPO resurgence sustainable with a healthy pipeline?
2. Where is the hyperscalers’ capex investment going?
3. Is a return on this investment showing up in the company’s revenues and earnings?
4. How affordable is “tokenomics” in comparison to the SAAS business model of tech companies?
5. Is the pool of retail investors continuing to grow in an ever steeper K-shaped economy?
6. Which companies and sectors are harnessing the productivity gains from AI and harnessing them into truly productive capacity?
Sources:
https://lnkd.in/dd5Mjj3U
https://lnkd.in/dss8KMM5
