Banks are finding out that inflation, which has helped their stocks, is a double-edged sword

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Banks have recently been one of the main beneficiaries of high inflation as their profit margins expand when higher prices force central banks to raise interest rates.

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At least, that was the thinking as investors bid up bank shares while rates climbed and inflation hit a multi-decade high. Now, megabanks including JPMorgan Chase and Citigroup are revealing that heated inflation in one area — employee wages — is casting a shadow over the next few years.

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Shares of JPMorgan fell more than 6% on Friday after the bank said spending would climb 8% this year to about $77 billion, driven by wage inflation and technology investments. According to CFO Jeremy Barnum, higher spending will push the bank’s returns in 2022 and 2023 below recent results and the lender’s 17% return-on-capital target.

“We’ve seen somewhat elevated attrition and a very dynamic labor market, as the rest of the economy is seeing,” Barnum said. “It’s true that labor markets are tight, labor inflation is slight, and it’s important for us to attract and retain the best talent and get paid competitively.”

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The bull case adds nuance to the owner of growth banks, which typically outperform other sectors in rising rate environments. While economists expect the Federal Reserve to raise rates three or four times this year, boosting the finance industry, there is a risk that runaway inflation could actually erase those gains, according to Barnum.

“On balance, a modest inflation that leads to higher rates bodes well for us,” the CFO told analysts in a conference call. “But in some scenarios, the increased inflationary pressures on spending may more than offset the benefits of rates.”

Citigroup CFO Mark Mason said on Friday that there was “a lot of competitive pressure on wages” because of the struggle for talent at banks amid a boom in deals and trading activity.

“We’ve seen some pressure on what it takes to attract talent,” Mason said. “You’ve also seen this at some of the lower, I should say entry levels in the organization.”

At JPMorgan, the largest US bank by assets, it is specifically the bank’s professional class – business workers, investment bankers and asset management workers – that have seen pay increases during two consecutive years of strong performance. The company had also increased the salary in branches last year.

“There is a lot of compensation for top bankers and traders and managers, who I must say have done an exceptional job over the years,” Chairman and CEO Jamie Dimon told analysts during a conference call. “We’ll be competitive in pay. If that reduces margins a little bit for shareholders, so be it.”

Dimon said that while overall inflation will “hopefully” begin to decline this year for the Fed to work on, “wage growth, and housing and oil are not fleeting, they will remain high for a while.”

In fact, Dimon told analysts that wage inflation will be a recurring theme among corporations this year. Some companies will navigate change better than others, he said.

“Please don’t say I’m complaining about wages; I think raising wages is a good thing for people who have wages going up,” Dimon said. “The CEO shouldn’t cry about it. They should just deal with it. The job is to serve your customer with all the factors you can.”

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