Wall St banks stockpile funds, see uncertain outlook and competition for
deposits
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[January 14, 2023] By
Megan Davies and Lananh Nguyen
NEW YORK (Reuters) -Wall Street's biggest banks stockpiled more
rainy-day funds to prepare for a possible recession, while showing
caution about forecasting income growth in an uncertain economy and as
higher rates increase competition for deposits.
The outlook for big U.S. banks has been clouded by the Russia-Ukraine
conflict and fading economic stimulus measures. Higher borrowing costs
as the U.S. Federal Reserve hikes rates have softened demand for
mortgages and car loans while raising the cost of deposits for banks.
JPMorgan Chase & Co, Wells Fargo & Co and Bank of America Corp gave
either disappointing or uncertain outlooks for net interest income (NII),
or the money banks bring in from interest payments, which is impacted by
the amount they have to pay customers to keep deposits in their banks.
"The U.S. economy currently remains strong, with consumers still
spending excess cash and businesses healthy," said JPM Chief Executive
Officer Jamie Dimon, although he said he didn't yet know "the ultimate
effect of the headwinds coming." The bank flagged a modest deterioration
in its macroeconomic outlook, "reflecting a mild recession in the
central case."
JPM, Bank of America, Citigroup Inc and Wells Fargo reported profits
ranging from up 6% to down 50%. Strength in trading helped offset a
slump in investment banking, while interest rate hikes by the U.S.
Federal Reserve helped income.
"Today’s bank earnings were solid, with net interest income driving
earnings, credit reserves significantly increasing year over year, and
investment banking fees remaining low – all largely reflecting the
interest rate and economic environment," said KPMG US National Sector
Leader for Banking and Capital Markets Peter Torrente.
JPM profit rose 6% on trading strength, and said it would resume share
buybacks. Bank of America reported a 2% rise in profits as higher rates
boosted income. However, Citi reported a 21% fall in profits, with
investment banking taking a hit. Wells Fargo reported that its profit
fell 50% as it racked up $3 billion in costs.
Shares were higher with JPM up 2.5%, Wells up 3.5%, Bank of America up
2.5% and Citi up 1.8%.
"What people are actually realizing is that the banks are probably going
to continue to generate quite healthy returns over the course of 2023,"
said Richard Ramsden, Goldman Sachs’ lead analyst on banks, despite
higher rates and a slowing economy weighing.
HIGHER-COST DEPOSITS
Net interest income was one area singled out to come under pressure this
year.
JPM's Dimon said there was more competition for deposits as higher rates
was causing customers to migrate to investments and other cash
alternatives meaning the bank was "going to have to change saving
rates."
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Citi bank ATM machines are seen in New
York City, U.S., March 17, 2020. REUTERS/Jeenah Moon/File Photo/File
Photo
Bank of America said that its mix of global banking interest-bearing
deposits had increased and it was "paying higher rates on those
deposits to retain them."
Ramsden said the banking industry is witnessing a trend of deposits
going into treasury markets directly or money market funds that
offer higher yields.
"You have to assume that some of these trends are going to persist,"
Ramsden said.
UBS analysts in a note said that JPM's guidance on NII of $74
billion, excluding markets, was below expectations. JPM in a
conference call said the outlook for NII was particularly uncertain.
Bank of America said the outlook for interest rates was too
uncertain to forecast NII for the year. Wells Fargo forecast NII up
10% this year versus 2022, which was below Refinitiv estimates of
16% growth. Citi in its investor presentation forecast NII of around
$45 billion for 2023 versus $43.5 billion excluding markets in 2022.
The four banks set aside a total of around $4 billion in funds to
prepare for soured loans: JPM set aside $1.4 billion, Wells Fargo
$957 million, Bank of America $1.1 billion and Citi $640 million.
Morgan Stanley and Goldman Sachs report next week.
M&A, TRADING
Banks have been hit by a slump in mergers, acquisitions and initial
public offerings, leading to job cuts by some banks like Goldman
Sachs.
JPM's investment banking unit's saw revenues down 57% while Bank of
America's investment banking fees more than halved in the quarter.
Those banks continued to add staff overall.
JPM's trading revenue, however, gained from market volatility as
investors repositioned bets to navigate a high interest rate
environment.
Meanwhile, consumer businesses were a key focus in banks' results.
Household accounts have been propped up for much of the pandemic by
a strong job market and government stimulus, and while consumers are
generally in good financial shape, more are starting to fall behind
on payments.
"The consumer still remains in pretty good shape," said Bank of
America's Chief Financial Officer Alastair Borthwick. "There's a lot
of pent-up demand," especially for travel, he said.
(Reporting by Saeed Azhar, Lananh Nguyen, Niket Nishant, Noor Zainab
Hussain, Carolina Mandl, Manya Saini and Mehnaz Yasmin; Writing by
Megan Davies; Editing by Nick Zieminski and Mark Porter)
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