The financial reports of all six major banks in the United States have been released, marking the beginning of the Q4 2023 financial reporting season. "Regulation" and "bad debt provisions" have become high-frequency terms. How does Wall Street view industry performance?
Throughout 2023, the stock prices of the six major banks showed varying trends. According to data from financial data company Wande, JPMorgan Chase leads its peers with a 30.6% increase and is the only bank stock to outperform the market. Following closely behind, Wells Fargo Bank rose by 22.9%, while Citigroup and Goldman Sachs rose by 19.0% and 15.9% respectively. Morgan Stanley rose by 13.9% during the same period, while Bank of America performed last, only slightly rising by 4.8%. During the period, the S&P 500 index accumulated a 24.2% increase.
James Early, Chief Investment Officer of BBAE Securities, said in an interview with First Financial News that major banks had many one-time special expenses in the previous quarter, which caused financial reports to be convoluted and it was difficult to describe the performance in one word. "It is worth mentioning that a high interest rate environment should be favorable for banks' performance. However, for a long time, bank stocks have seriously lagged behind the market, not to mention that the Federal Reserve has hinted that it will cut interest rates several times this year."
New regulatory regulations impact the profitability of large banks
In March of last year, after the liquidity crisis erupted in banks such as Silicon Valley and Signature Bank, the Federal Deposit Insurance Corporation (FDIC) of the United States consumed a large amount of deposit insurance funds to provide relief for regional banks. In May of last year, the FDIC launched a fund replenishment plan, requiring large banks with total assets exceeding $50 billion to bear 95% of the total loss of deposit insurance funds, while banking institutions with total assets below $5 billion do not need to pay special fees.
The six major banks in the United States are all required to fulfill the above obligations. In the latest financial reports, each bank disclosed related expenses and net profits have also decreased to varying degrees. Ji Junli told First Financial reporters that the high special expenses were one of the triggers that dragged down the decline in performance.
According to the financial report of JPMorgan Chase, the largest bank in the United States in terms of assets, its revenue for the fourth quarter of 2023 was $39.9 billion, a year-on-year increase of 12%. Net profit decreased by 15% from the same period in 2022 to $9.3 billion, and regulatory fees related to the regional banking crisis were $2.9 billion. In addition, it recorded an investment loss of $700 million during the period.
The second largest bank in the United States, Bank of America, has also been hit by new regulatory regulations in terms of profitability. Last quarter, the bank paid $2.1 billion to FDIC, with net profit halving to $3.1 billion year-on-year and revenue of $22 billion, a decrease of 10% year-on-year.
Citigroup's worst quarterly performance since 2009, with a year-on-year decline of 3% in revenue to $17.4 billion, a huge loss of $1.8 billion during the period, FDIC related expenses of $1.7 billion, Argentine peso exchange loss of nearly $900 million, and provision for bad debts of $1.3 billion. Citigroup stated that if the above expenses and losses were excluded, it could achieve a profit of $0.84 per share in the previous quarter.
Morgan Stanley's fourth quarter revenue was $12.9 billion, a slight increase of 1% year-on-year, with a net profit of $1.5 billion, a decrease of nearly 32% from $2.2 billion in the same period last year. The company also involved FDIC special evaluation fees of nearly $300 million and paid $250 million to the Securities and Exchange Commission (SEC) to settle fraud allegations.
Last quarter, Fuguo Bank's revenue increased by 2% compared to the previous year to $20.5 billion, with a net profit of $3.5 billion, a year-on-year increase of 9%. During the period, the bank paid $1.9 billion in special assessment fees to regulatory authorities, and bad debt provisions also increased by 34% to $1.3 billion.
Goldman Sachs performed outstandingly among its peers, with revenue increasing by 7% year-on-year to $11.3 billion. Thanks to strong asset and wealth management businesses, the bank's net profit surged by 51% to $2 billion. Unlike its more diversified competitors, Goldman Sachs generates most of its revenue from Wall Street and is more likely to achieve excess returns during market prosperity. In the fourth quarter of last year, asset and wealth management revenue increased by 23%, while stock trading revenue surged by 26%. During the period, the bank paid a fee of $500 million to FDIC.
Da Xing Sect Leader Looking Forward to Economic Prospects
Regarding the outlook for the US economy, Ted Pick, the new CEO of Morgan Stanley, warned on the 16th that geopolitical conflicts and major downside risks to the US economy may put pressure on 2024 performance. "The basic scenario is a good economy, which means achieving a 'soft landing', but if the economy weakens significantly in the coming quarters, the Federal Reserve must act quickly to avoid a 'hard landing', which may lead to a decline in asset prices and sluggish economic activity. He also believes that inflation may continue to challenge consumers and supply chains, causing interest rates to remain high for a longer period of time.".
JPMorgan Chase CEO Jamie Dimon said that the economy continues to remain resilient, consumers are still spending, and the market currently expects the economy to achieve a "soft landing". However, fiscal deficits and supply chain adjustments may lead to more sticky inflation, resulting in higher interest rates than market expectations. He also stated that the risks faced by the market and economy include central bank restrictions on monetary policy and geopolitical tensions.
Matt Weller, Global Research Director of Jiasheng Group, stated in a report sent to First Financial that most market participants and macro forecasters tend to prefer a "soft landing" scenario, where real growth slows down, inflation decreases, while the job market maintains some resilience, and the Federal Reserve adopts a more relaxed monetary policy. Bank stocks are one of the relatively better performing sectors in this environment. "Overall, consumers and small businesses are still in a good state, supporting the profits of the banking industry. The resilience of the consumer sector will support banks' credit business, mortgage business, and so on. In the 'soft landing' scenario, coupled with the relaxation of financial conditions, it will also drive more capital expenditure, recruitment, and M&A activities." Weiler said.
Layoffs overcome difficulties
Faced with declining performance, major banks have started layoffs to overcome difficulties.
According to media statistics, Fuguo, Bank of America, Citigroup, and Goldman Sachs collectively laid off over 20000 employees last year. To boost performance and stock prices, Citigroup is aggressively streamlining its structure, announcing a 10% layoff in the next two years, which will affect 20000 employees, while disclosing its latest financial report.
Many bank executives believe that the industry is currently in the most difficult operating environment since the 2008 financial crisis, so they are shrinking their scale in all aspects, stabilizing profits through layoffs, reducing investment, and shrinking business to overcome the difficulties.
Ji Junli stated that the financial sector has not experienced a year of "water crisis", and the next decade may not be the right time. "Advanced technologies such as artificial intelligence have replaced many human resources, and I believe this trend will strengthen. If the number of bank employees remains the same in the next three to five years, it would be shocking. I expect to see more layoffs and the banking system will continue to streamline."