Interest rate increases drive high profits for banks, but inflation has compounded to the point of creating an entirely new experience for financial institutions and their backers. Fourth-quarter comparisons show that two major money handlers, Bank of America and Morgan Stanley, have managed to buck the trend of soaring costs and pay.
While BofA reported lower cost growth last year than most of its rivals, it will strive to keep expenses flat for this year. Its rivals tend to believe that further inflation and a marked increase in technology spending are on the horizon, but BofA Chief Financial Officer Alastair Borthwick thinks inflationary pressures should be offset in part by cuts to COVID-19 operation costs.
On the other hand, Morgan Stanley saw low cost growth in the fourth quarter compared to the previous year with relatively flat pay growth. Its cost increases outpaced those of its rivals, but the acquisitions of E*Trade Financial and Eaton Vance accounted for extra revenue. Those deals notably lifted Morgan Stanley’s wealth and asset management revenue share from one-third of its business in 2009 to more than half last year.
Although cost consideration is paramount, the shifts in bank stocks through this earnings season are reflective of investors leaning towards banks with a guarantee of reliable revenue. Loan growth is at long last returning, and if the Federal Reserve keeps its pace, the banks stand to benefit from rising interest rates and yields to help offset inflationary expenses.