21st Century Business Herald reporter Chen Zhi reports from Shanghai
The substantial loan spread income brought about by the Federal Reserve's significant interest rate hike cannot reverse the downward trend in the performance of large banks on Wall Street.
Recently, several large banks on Wall Street released their financial reports for the fourth quarter of last year. Among them, JPMorgan Chase achieved a net profit of $9.307 billion for the quarter, a decrease of 29% month on month and 15% year-on-year, respectively; Bank of America achieved a net profit of $3.144 billion in the quarter, with a month on month and year-on-year decrease of 59.7% and 55.92%, respectively; Citigroup had a net loss of $1.839 billion for the quarter, which was a loss from the previous quarter; Wells Fargo achieved a net profit of $3.446 billion in the quarter, a 40% decrease compared to the previous quarter.
Citigroup CEO Jane Fraser bluntly stated that the company's performance was "very disappointing".
In the eyes of industry insiders, the performance of major Wall Street banks generally declined in the fourth quarter of last year. One important reason is that the Federal Reserve Insurance Company charged about $8.6 billion in special fees to major Wall Street banks such as JPMorgan Chase, which significantly impacted their profitability.
Among them, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo Bank paid special fees of $2.9 billion, $2.1 billion, approximately $1.7 billion, and $1.9 billion respectively in the fourth quarter of last year.
The so-called special fees refer to approximately 113 large banks required by the Federal Reserve Insurance Company to pay a total of $15.8 billion in quarterly additional payments for two years starting from the middle of this year, in order to cover the funds lost as designated receivers by federal regulatory agencies to rescue depositors of Silicon Valley banks and signature banks who have been hit by a run on bankruptcy.
"At present, several large Wall Street banks have made early provisions to pay this special fee in order to get rid of its impact on future performance as soon as possible, but this has led to a significant decline in their performance recently," said a Wall Street hedge fund manager.
Research institutions have analyzed that due to the fact that large Wall Street banks with assets exceeding $50 billion bear over 95% of their special fee payment obligations, although the Federal Reserve Insurance Company allows them to pay additional special fees in eight quarterly installments, if the special fees payable are converted into the impact on banks in a single quarter, it may lead to an average quarterly revenue decrease of 17.5% for large Wall Street banks.
In the view of the hedge fund managers on Wall Street mentioned above, the most important factor leading to the decline in performance of large banks on Wall Street in the fourth quarter of last year was not the payment of special fees, but the cooling of the US economy leading to a decline in credit demand, coupled with an increase in bad debts of corporate and personal loans, which is causing a decrease in bank credit interest income and an increase in bad debt provisions, devouring more profits.
It is worth noting that in the face of losses in the fourth quarter of last year, Citibank has decided to lay off about 20000 employees to "cut costs".
Why did the performance plummet
In the eyes of many industry insiders, the significant special fees paid by major Wall Street banks in the fourth quarter of last year were a major catalyst for their decline in quarterly performance.
In May last year, the board of directors of the Federal Reserve Insurance Company of the United States passed a draft regulation requiring 113 large bank members to pay a total of $15.8 billion quarterly over the course of two years starting from the middle of this year, in order to fill the funds lost by them as designated receivers of federal regulatory agencies to rescue the principal safety of Silicon Valley Bank and Signature Bank depositors.
The draft regulations propose that 113 banks with assets exceeding $5 billion must pay additional special fees in eight quarterly installments starting from the end of the second quarter of 2024. The specific annualized rate is approximately 0.125% of the uninsured deposit amount of each bank.
A Wall Street banking insider previously stated in an interview with 21st Century Business Herald that the reason why the Federal Reserve Insurance Company requires large banks to pay additional special fees in eight quarterly installments is to minimize the impact on bank revenue as much as possible.
But what surprised the market was that the special fees paid by large Wall Street banks still had a significant impact on their performance for the quarter,
Data shows that JPMorgan Chase paid $2.9 billion in special fees in the fourth quarter of last year, accounting for approximately 31% of its profit of $9.3 billion for the quarter, while Wells Fargo Bank paid $1.9 billion in special fees, accounting for approximately 55% of its profit of $3.446 billion for the quarter.
The above-mentioned hedge fund managers on Wall Street pointed out that many investment institutions had already included the impact of special fee payments in their performance forecasts for the fourth quarter of last year. However, the profits of several large Wall Street banks are still lower than market expectations, and another important reason is the unexpected increase in bad debt write offs.
Data shows that in the fourth quarter of last year, the amount of bad debt written off by Wells Fargo Bank and Bank of America reached $1.258 billion and $1.192 billion, respectively, accounting for about 36% and 37% of their quarterly profits.
Behind this is the continued significant interest rate hikes by the Federal Reserve, coupled with a cooling of the US economy, which has led to a continuous increase in default situations for individual corporate repayments.
According to the latest data released by data provider Epiq AACER, the total number of bankruptcy applications in the United States (including corporate and personal bankruptcies) increased from 378300 in 2022 to 445200 last year. Among them, the number of bankruptcy applications from enterprises increased by 19% from 21500 in 2022, reaching 25600; The number of individual consumer bankruptcy applications increased from 356900 in 2022 to 419600, a year-on-year increase of 18%.
Michael Hunter, Vice President of Epiq AACER, stated that the number of consumer and business applications seeking bankruptcy protection will continue to increase in 2024, given the weakened impact of US economic stimulus measures during the pandemic, rising costs and interest rates of funds, rising default rates on repayments, and household debt approaching historical levels.
According to data released by the Federal Reserve Bank of New York, as of the end of the third quarter of last year, US household debt had reached a record high of $17.3 trillion, and the repayment default rate was also slightly increasing.
"This indicates that large Wall Street banks will have to allocate more capital and profits for bad debt provisions, leading to severe challenges for their profitability in the future," said the aforementioned Wall Street hedge fund manager.
Layoffs to overcome difficulties?
Faced with a decline in performance in the fourth quarter of last year, major Wall Street banks have once again started a layoff model.
Affected by the worst quarterly performance since 2014 in the fourth quarter of last year, Citigroup has decided to lay off 10% of its workforce, approximately 20000 people.
In the eyes of industry insiders, one important reason why Citigroup has once again made significant layoffs is that its performance is significantly weaker than that of its peers in major Wall Street banks. Specifically, although JPMorgan Chase, Bank of America, and Wells Fargo have all experienced a month on month decline in profits, they are still in the profit stage. However, Citigroup's significant losses may trigger stronger pressure from the board and major shareholders on management to take stronger measures as soon as possible to turn losses into profits and boost stock prices.
Citibank stated that the layoffs may result in costs of $1.8 billion, but after the layoffs end in 2026, Citigroup is expected to save $2.5 billion annually.
Several Wall Street investment insiders have pointed out that the current operational challenges facing Citigroup far exceed those of other large Wall Street banks. In addition to special fee payments and the cooling of the US economy, Citigroup also faces challenges such as high business restructuring expenses, increased exposure to Russian business risks, and the significant depreciation of the Argentine peso, all of which have led to greater revenue pressure on Citigroup.
Affected by these factors, Citigroup's revenue in the fourth quarter of last year decreased by 3% year-on-year to $17.44 billion, lower than market expectations of $18.74 billion.
Jane Fraser admitted that Citigroup's performance has been very disappointing, but he emphasized that Citigroup has made substantial progress in simplifying its organizational structure and implementing strategies, and it is expected that 2024 will be a "turning point".
Several Wall Street investment firm insiders have bluntly stated that if Citigroup's revenue and profits continue to decline, it is not ruled out that Citigroup will take stronger layoff measures.
In response to layoffs, Citigroup has issued a statement stating that as Citigroup rapidly shifts towards a new business model, the company is committed to retaining the best talent while providing support for departing employees.