Banks cash in as Wall Street blows out Main Street

America’s big banks capped off a winning year, led by soaring Wall Street-facing business lines.

Why it matters: Banks cashed in on the white-hot IPO market, record debt issuance, and sky-high trading volume — all of which played out as economic peril softened the consumer side of their businesses.

The big picture: Financial results show that banks, which rake in money as middlemen, made a killing thanks to unprecedented action by the Federal Reserve — which caused a rush of activity in financial markets, pushed a slew of companies to issue debt, and led to a flood of others to go public for the first time.

That's made up for weakness in their Main Street-facing businesses (think credit cards services or personal/business loans).

• There's been a drop-off in loan demand from consumers and mom-and-pop type companies, who are less eager to borrow (or can't) as the pandemic runs its course.
• Even during the holidays, which are typically a strong time for spending, credit card lending fell by 0.2%, according to Fed data analyzed by FactSet.

What they're saying: Big banks’ “trading results don’t totally match up with what’s happening in the real world, but they do reflect macro trends that are happening,” says Mark Doctoroff, co-head of the Financial Institutions Group at MUFG. 

• “The parts of the economy where traditional banks do business, there’s no activity. Loan volume is doing very poorly,” says long-time bank watcher Dick Bove.

By the numbers: JPMorgan, the country’s biggest bank, posted its best-ever profit in the last three months of 2020 — boosted by its corporate and investment bank, which set a new divisional record for annual revenue.

• At Citibank, revenue at the trading and investment banking business line also had a record-breaking year. In one sign of consumer softness, credit card spending fell 7% last quarter from 2019 — though it was among the highest levels seen in 2020.
• Morgan Stanley, less exposed to Main Street, said its trading desk had the strongest revenue growth in over a decade. Trading revenue at Goldman Sachs hit a 10-year high.

Flashback: The 2020 story is an about face from the prior year when banks said strong consumer activity made up for lackluster trading desk volumes.

• Revenue in JPMorgan’s consumer and community banking unit fell 7% in 2020, after growing by just as much in the prior year. 
• Corporate and investment banking revenue jumped 26% from 2019, after rising 5% the year before.

Worth noting: Banks are slowly releasing some of the more than $30 billion they cumulatively set aside to cover bad loans (which also took a bite out of profits). It's a sign executives think the worst of the coronavirus’ economic hit is over, particularly with another big stimulus package backed by the Biden administration. 

• At the onset of the pandemic, banks anticipated widespread loan defaults. That hasn’t come to pass, namely because of a flood of stimulus that’s helped keep the economy from freefalling even further.
• The bridge to get the U.S. economy over the pandemic hump was strong enough, Jennifer Pipeszak, JPMorgan’s chief financial officer, told investors last week. “The question that still remains is, is the bridge long enough,” Pipeszak says.