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Are US Banks Really Better?

At first glance, the major US banks have again presented impressive figures for the second quarter.
The nationwide number one, JPMorgan, was able to increase its profit year-on-year by two and a half times, to 11.9 billion dollars, around ten billion euros. That was more than industry observers expected.
CEO Jamie Dimon spoke of solid results across all business areas and was also confident for the rest of the year as the US economy continued to recover from the corona pandemic. 
The country’s other large financial institutions such as Bank of America or Citigroup also reported some spectacular leaps in profits. Overall, the surpluses of the six largest banks in the country between April and June add up to $ 42.1 billion.

Loan loss provisions dissolved

But the absolute numbers hide a number of weaknesses and peculiarities that let the shine of the billions fade a little.

The increased profits are primarily explained by the fact that the banks were largely able to dissolve the reserves they had built up for loans at risk of default during the Corona crisis.

At JPMorgan that was $ 2.3 billion. The numbers were also below those of the previous quarter.

In addition, day-to-day business was much less smooth than expected. For example, JPMorgan had to accept a decline in its revenue of around eight percent to $ 30.5 billion in the second quarter.

There was less money to be made in securities trading than before, and the consumer credit business weakened.

 The money house was successful in traditional investment banking, i.e. advising on mergers and takeovers. The support of the numerous IPOs in the USA also brought more money into the coffers.

More dividends allowed against banks pass the stress test
While Europe’s banks are only allowed to pay dividends to a limited extent, the limits for US banks have fallen.
The recovery in the US economy takes some of the pressure off

Bank of America and Citigroup also increased their profits last quarter thanks to the liquidated reserves for bad loans. Even the fourth-largest US bank, Wells Fargo, which had long been in crisis, earned six billion dollars thanks to the liquidation of its loan loss provisions. In the second quarter of the previous year, it had reported a loss of $ 3.85 billion. Last year, US institutions had to put billions of dollars aside on their balance sheets to prepare for a wave of loan defaults. But that hasn’t happened so far. In addition, the global economic outlook is brightening again.

In contrast, trading in securities is declining. At Bank of America, earnings in the fixed income business plummeted 38 percent and in stock trading by 33 percent. At Citigroup, total revenues slumped by twelve percent to $ 17.5 billion. In bond trading, the losses were even greater than in the case of its rival, on the other hand, it recorded an increase of 37 percent in stock trading.

In addition, both institutes reported rising costs. The banks are encouraged by the strong economic growth; the US economy is expected to grow by a good six percent this year. “The pace of the global recovery is exceeding our previous expectations and is accompanied by increasing economic confidence among consumers and companies,” said Citi CEO Jane Fraser. This gives her confidence in the further business development of the bank.

US financial industry head start why German banks earn less

Some major US banks were able to multiply their profits at the beginning of the year.

Declining trade income

In this country, the bank balance sheets are likely to be more mixed in the second quarter. Deutsche Bank boss Christian Sewing has already warned that income in investment banking will no longer be as abundant as in the same period of the previous year. Because of the corona crisis, states and companies had a greater need for financing. This special demand has ceased to exist. How much this trend will weigh on Deutsche Bank, which is one of the world’s largest bond traders, will become apparent at the end of the month when the domestic industry leader presents its quarterly figures.

One thing is already certain: the German financial industry can only dream of the double-digit returns on equity of the large US companies. For example, JPMorgan recently achieved a return on equity of 18 percent, at Deutsche Bank, it was seven percent in the first quarter. The savings banks reported a return (before taxes) of only 5.4 percent for the past year.

Higher costs and lower revenue per customer are the main reasons for this difference that has existed for years. Experts explain this with the different framework conditions. In this country, the financial houses suffered mainly from the fragmentation of the market, both within Germany and at the European level, while the US banks could work more cheaply thanks to their size, with higher prices for their customers at the same time.

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