Higher interest rates might be good for bank profits, but inflation has still been a shock for bank investors in recent days.
Bank of America and Morgan Stanley offered some respite from the story of rising pay and other costs on Wednesday, however, reporting less of a jump in the fourth quarter than that of most big rivals.
Beyond the simple tale of costs, the moves in bank stocks through this earnings season have also underscored investor preference for banks with a promise of reliable revenue from traditional lending and wealth management over those exposed to the volatility of trading in financial markets and advising on deals.
Loan growth is finally beginning to return and should benefit from rising interest rates and yields—as long as the Federal Reserve doesn’t move too quickly. This ought to help offset inflation in expenses, too.
Bank of America reported lower cost growth in 2021 than most other chief rivals aside from JPMorgan Chase and Wells Fargo. But BofA expects to keep expenses flat this year, which sounds bullish compared with many rivals that expect to see further inflation and higher spending on areas such as technology.
The difference at BofA is that Chief Financial Officer Alastair Borthwick said inflationary pressures should be offset in part by cuts to some of the extra costs related to operating through the Covid pandemic, such as paying for child care for some employees so they could keep working or paying some staff members to stay at home when bank branches weren’t open.
The disruption caused by Covid is expected to wane, but the virus has hardly been predictable, so this forecast could be a hostage to fortune.
Morgan Stanley, meanwhile, reported low cost growth in the fourth quarter compared with the period a year earlier, and pay growth was essentially flat. For the full year, its cost increases were greater than those for all its rivals, but that includes the acquisitions of E*Trade Financial and Eaton Vance, which bought additional revenue, too. Its costs per dollar of revenue fell marginally over the year.
Those deals have helped lift the revenue share that the bank gets from wealth and asset management to more than half last year from about one-third in 2009, just before James Gorman took over as CEO.